The rapid increase in the popularity of the infrastructure assets has prompted concerns among some investors and fund managers that the influx of capital into the niche sector is driving up prices for the best assets. Indeed, some commentators within the asset class have even prompted a discussion about whether asset prices may be experiencing a bubble. Respondents to our recent Preqin Investor Outlook study acknowledged this very issue. One German asset manager remarked that “fundraising is very active and a lot of money is coming into the market, so we are afraid about too much money increasing valuations and declining returns.” Another US public pension fund voiced similar views, stating that it was ‘concerned about the amount of capital chasing a fairly limited number of deals, especially at the higher end of transaction size.’
The risk/return profile of the infrastructure asset class is diverse and depends on the type of fund and chosen strategy. Some investors commit to infrastructure funds as an extension of their return-seeking private equity policy, while others are looking for lower longer-term yields. As a result, the return profile of the asset class can be varied. Fund managers chasing high mid-teen returns competing for assets with managers aiming for lower, stable mid-to-high single digit returns will likely find that expected asset prices will surpass the level appropriate for their fund’s return profile.
Using Preqin data we can see that average infrastructure deal sizes have remained relatively constant over the years. In 2012, the average infrastructure deal size decreased by 23% from the $520mn average in 2011, to $402mn. Average deal size thus far in 2013 stands at $467mn. When focusing purely on the core infrastructure sectors, which are traditionally the most popular in the space, , asset prices have increased steadily since the financial crisis from a low of $367mn in 2009, to a post-crisis high of $529mn in 2011. The average deal size for core infrastructure assets in 2013-to-date totals $526mn. Whilst a slight growth in asset valuations and average deal sizes are being recorded across infrastructure industry sectors, asset prices are generally still relatively constant. As such, the idea of a general bubble within the sector may not be the case, but this may be a different story for the most desirable and investible infrastructure assets and those competing for access to them.