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THE CONSEQUENCES FOR INFRASTRUCTURE INVESTING
A number of megatrends are reshaping the industry of infrastructure investing and asset management.
The data discussed in the article MEGATRENDS RESHAPING THE INFRASTRUCTURE SECTOR indicate that infrastructure as an asset class is clearly moving toward maturity and toward more precise specialization among asset managers in terms of strategies for the various sub-asset classes (e.g., core, core plus, value added). Maturity leads to more intense competition in the asset class, to higher levels of dry powder, and to increased pressure on multiples and prices paid. The risk of overpayment threatens the capability of asset managers to offer their investors a reasonable yield in the years to come.
In my view, the scenario has four main implications for the industry of infrastructure asset management:
- The infrastructure sector is no longer the monolith it was in the past. Megatrends are increasingly blurring the boundaries between different segments of the infrastructure universe. Furthermore, barriers to entry are weaker than in the past and new competitors are challenging incumbents. Infrastructure is no longer the “safe harbor” of alternative investments.
- Asset managers are no longer monopolists in the market. The biggest investors are increasingly showing signs of internalizing investment capabilities, and they are side-stepping infrastructure asset managers by building internal teams and co-investing with industrial developers.
- Wise infrastructure asset managers must abandon the traditional “silo” approach to investments (i.e., specialization in rigid sectors) and adopt a “principle based” approach based on “eligibility tests” if they really want to capture the benefits of the megatrends. Clearly, this will require a more open-minded attitude. It will also challenge the traditional business model, which has been based on the excellence of skills as well as knowledge of specific sectors and subsectors.
- The increased competition for the asset class and increased prices require that asset managers pay more attention to the quality of management teams in investee firms. Revenue increases and cost optimization through well-designed strategic rethinking are key for ensuring a good, sustainable long-term yield for investors. More traditional private-equity value drivers (i.e., leverage and arbitrage) will play only a minor role.
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About the author:
Stefano Gatti is the Antin Infrastructure Partners Chair Professor of Infrastructure Finance and Professor of Practice in Finance. He is the Director of the Full Time MBA and former Director of the International Teachers’ Programme at SDA Bocconi School of Management. His main area of research is corporate finance and investment banking. He has published in these areas including publications in the Journal of Money, credit and banking, Financial Management, the Journal of Applied Corporate Finance and the European Journal of Operational Research. Professor Gatti has published a variety of texts on banking and finance areas and has acted as a consultant to several financial and non-financial institutions and for the Italian Ministry of the Economy, the Financial Stability Board, The InterAmerican Development Bank, the Asian Development Bank and the OECD/Group of G20. He is financial advisor of the Pension Fund of Health care professions, member of the compliance risk committee of Deutsche Bank and member of the Board of Directors and board of auditors of Italian industrial and financial corporations.
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