Real asset investment: The infrastructure moment is now
There are multiple transitions under way in the world economy, driven by the need for decarbonization, digitalization, and sustainability. For real asset investors this spells opportunity and risk in an ever-more complex world of interacting forces.
Real assets have always formed part of balanced investment approaches, but there is now an upsurge of interest in real or tangible assets as a class. Real assets — whether in transport or communications, energy, data, or real estate — form the physical underlying infrastructure of the global economy. Today, that is being reshaped by powerful forces including demographic shifts, the adoption of new technologies, and energy transition on a global scale.
There are many definitions of what constitutes a real asset, but most investment professionals would agree that these are assets which are physical, tangible, and fairly long-lived. They are investible through equities, funds, and direct ownership, but they do not include intangible assets — the likes of intellectual property — or pure financial assets, such as derivatives or many forms of debt.
Why real assets now?
Investors have always liked real assets for their qualities of low volatility and low correlation to business or market cycles. The downside has been low liquidity and, perhaps more importantly, a restricted band of investment types and risk profiles. But that is already changing, said Laurence Monnier, an infrastructure advisor and Investment Committee Member at ImpactA Global, Temporis Capital and LBPAM.
“People have come to think of real assets more holistically,” said Monnier. “You may have conventional asset types like roads or airports, and you can call that the vertical dimension. But there is also a horizontal dimension, which is the business model attached to the asset. More and more investors now think about assets in terms of the type of risk and the type of business model, rather than the type of asset.”
There is evidence that this evolution is attracting a larger and more diverse investor group. Research on the composition of the total global capital stock shows that private equity (often the vehicle of choice for real asset investors) and real estate together have taken an increasing share of the world’s total capital investment over the past 15 years.
This is not to say that the real asset class will or should become dominant, but rather that it is increasingly capable of playing a pivotal role in investment strategies, said Chris Hunt, Co-founder and Director at UK workspace developer V7.
“If you see real assets within the bigger world of where an investor should be allocating capital, my view is still that everything should be balanced, with an allocation across all sectors,” he said. “With real assets there is an inherent underlying value that can also serve well from an income perspective and a capital growth perspective.”
A moment with multiple drivers
Asset formation is frequently the result of structural change in economies — and today there are several drivers of such change. Real asset specialists such as Rob Martin, Global Head of Investment Strategy and Research, Private Markets at Legal & General Asset Management, identify these drivers as economic “mega-trends.”
“There are a lot of tangible assets that benefit from global mega-trends,” said Martin. “It’s not just demographics, but also deglobalization, decarbonization, and digitalization — the four big Ds. There is an access point for investors to benefit from all of those.”
Of these four trends, many identify decarbonization as the most significant, not least because it impacts so many real asset sub-classes. “The overarching theme here is decarbonization,” explained Martin. “There is the need to reinvent the energy system and I think one of the things that is increasingly well understood is that this is going to involve investment in a whole set of different kinds of interrelated real assets.”
The scale of the energy transition appears likely to dwarf other real asset segments. Given that countries accounting for almost 82% of global greenhouse gases have adopted net-zero targets, and that policy remains very transition-friendly in the US and Europe, the investment totals on the road to achieve this are likely to be huge. BloombergNEF estimates that achieving net-zero would imply over USD194 trillion in new spending by 2050.
The real asset preference
Some investment specialists point to what looks like an increasing investor preference for real assets thanks to a growing interest in impact investing and the perceived advantages of private markets, which are the natural arena for active direct investment in real assets.
“For many investors there is a real interest in impact and environmental and social outcomes,” said Martin. “Real assets have tangible characteristics that can achieve impact. It is true they can be damaging, but equally they can be very constructive from an environmental and social perspective. Those are the some of the structural characteristics that have been driving interest over the past few years.”
An increased appetite for risk in what was once seen as a low-risk asset class has also been one of the drivers of the enlargement of the real asset investor base. And there is indeed risk, said Monnier, especially where technologies are changing fast.
“Investors tend to do cash-flow forecasts over 20 years and that’s how they raise their debt,” she explained. “What keeps me awake at night is the fact that with today’s technology change you can’t predict how things will be in the next five years, let alone in 20 years. In particular, there is a big regulatory risk — if you are financing a diesel train network, for example, you don’t know if they’re still going to be allowed to run in a few decades.”
Investing in society
As with all shifts in investment thinking, the infrastructure moment challenges investors to analyze and price real assets against a background of evolving technologies, shifting demand, and regulatory uncertainties. The fact that there is more risk in the real asset investment space is an inevitable corollary of greater opportunity.
That does not seem to discourage an increasing number of investors, said Laurene Mahon, an independent infrastructure advisor and former senior expert with McKinsey.
“Most investors say they’re increasing their allocations,” she said. “And there is a universal acknowledgement that if we don’t invest in infrastructure, we’re not properly investing in the growth of our societies, in human well-being. We need to invest in water, we need to invest in power, we need to invest in transport, we need to invest in data. That’s really going to drive a lot of investment.”
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