Private Infrastructure: Investing in Tomorrow, Looking After Your Portfolio Today

3 days ago

5 min read

Understanding Private Infrastructure’s Role in a Portfolio

By Brendan McCurdy, Managing Director, Global Head of Investment Strategy,

Ares Wealth Management Solutions

DEFINING THE OPPORTUNITY

The data and artificial intelligence (“AI”) revolution, the internet-of-things, smart cities, booming power demand; the way we live has changed, creating a “New Economy” in the process. The infrastructure that supports and connects it all is now garnering the recognition it deserves.

Pair these long-term secular tailwinds with a growing portion of funding for infrastructure supplied by private capital, and we uncover what may be a generational opportunity for investors. But what purpose does it serve in an asset allocation, and more importantly, how can you thoughtfully gain exposure to this asset class in your portfolio? In this edition of Private Market Insights, we address those questions.

How private infrastructure can empower a portfolio

1. HISTORY OF STRONG RISK-ADJUSTED RETURNS

Over the past 20 years, private infrastructure has delivered a ~9% annualized return, outpacing global equities and its listed counterparts. What investors particularly appreciate is the historical consistency of those returns. Private infrastructure has exhibited equity-like returns with closer to bond-like volatility and thus has occupied a favorable position on the risk-return spectrum.

All data quarterly. Above represents 20 years of growth from the period Jun 2004 – Jun 2024. Private infrastructure represented by Burgiss All Infrastructure Index. Public equity represented by MSCI World Index. REITs represented by FTSE-NAREIT All Equity REIT Index. Public listed infrastructure represented by S&P Global Infrastructure Index. Agg bonds represented by Bloomberg US Aggregate Bond Index. High yield represented by Bloomberg Global High Yield Bond Index.

2. DIVERSIFICATION

Perhaps as one of its most appealing qualities, private infrastructure has low-to-moderate correlation to many traditional asset classes. More importantly, it represents access to a different set of assets that have unique return profiles—something we believe investors are seeking now more than ever.

All data quarterly. Above represents the 20-year period from Jun 2004 – Jun 2024. Same indices as above.

Past performance is not an indicator of future returns. Diversification does not assure profit or protect against market loss.

3. RELATIVE STABILITY DURING MARKET STRESS

Not only has private infrastructure historically been somewhat sheltered from public market downturns (evidenced by fewer and shallower drawdowns), but it has also acted as a hedge against inflation and GDP contraction. Even during recessions and inflation regimes, essential hard assets continue to be indispensable.

Putting private infrastructure to work in your portfolio

We believe investors have historically been under allocated to infrastructure relative to traditional asset classes, largely because “public” or “listed” infrastructure has been the primary access point for the wealth channel. Generally, owning listed infrastructure has meant owning heavier, dirtier and older infrastructure or the individual companies that own and operate these assets. For those reasons, public infrastructure has been more similar to lower-beta, lower-return public equities. As a result, many investors today have minimal exposure to the asset class generally through investments that mirror broad market indices.

We believe private infrastructure allows investors to get exposure to the buildout of the “New Economy”—power (e.g., natural gas, nuclear, renewables, battery storage), mobility, digital (e.g., fiber, cell towers, data centers)—a more contemporary investment thesis for infrastructure.

Sources: Goldman Sachs, “The US is poised for an energy revolution” (April 2023); Synergy Research Group (2023). Projections and forward-looking statements are not reliable indicators of future events and there is no guarantee that such activities will occur as expected or at all.

As investors begin to think about adding private infrastructure to their portfolios, a starting point is often core infrastructure. Core sits on the low end of the equity risk-return spectrum for private infrastructure and can see half or more of its return in the form of income. Importantly, core equity represents long-lived, fully constructed, contracted and cash-flowing infrastructure assets. With this in mind, we see the potential for private infrastructure to meet a number of our clients’ objectives—namely boosting total portfolio yield and diversification in the wake of falling yields and rising correlations.

Like other asset classes, the funding source for private infrastructure should be dictated by the needs and goals of the portfolio. For this, we typically look at three scenarios—each with a different end goal in mind:

Illustrative examples of enhancing a 60/40 with a 20% private infrastructure allocation

As awareness and demand for the asset class continues to expand, we believe private infrastructure will become a meaningful part of individual allocations. However, we recognize the importance of being thoughtful in how you incorporate private infrastructure alongside the rest of the portfolio.

We are convinced that private infrastructure is worth considering as its own asset class with unique characteristics, and that it is truly doing something different in the portfolio.

About Ares’ Investment Strategy Team

Ares’ Investment Strategy team offers resources and one-on-one support to help navigate the complexities of private markets investing. The team’s goal is to empower investors to confidently incorporate private markets investments into portfolios. The educational content, research and analytics that the team delivers are designed to enhance the understanding of the benefits of private markets investments. The team is a skilled and knowledgeable team of professionals who can answer questions and foster more informed decisions.

AccessAres is the thought-leadership and educational division of Ares Wealth Management Solutions. The materials distributed by AccessAres are for informational purposes only and do not constitute investment advice or a recommendation to buy, sell or hold any security, investment strategy or market sector. Ares Wealth Management Solutions is a global brand of Ares Management Corporation.

Ares Wealth Management Solutions is a global brand of Ares Management Corporation.

The views expressed in this document are those of the author as of the publish date, are subject to change without notice in reaction to shifting market conditions, and may not necessarily reflect the views of Ares Management Corporation (“Ares Corp,” together with Ares Management LLC or any of its affiliated entities “Ares”).

Investing involves risk including the loss of principal. Financial advisors must carefully consider the risks and other suitability details in determining appropriate investments for their individual clients’ portfolios.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results an investor can expect to achieve. These materials may contain “forward-looking” information that is not purely historical in nature, and such information contained herein is based upon certain assumptions about future events or conditions and is intended only to illustrate hypothetical results under those assumptions (not all of which will be specified herein).

Investing in private markets involves risk including the loss of principal. Other risks include, but are not limited to: illiquidity risk, valuation risks, and a number of other risks related to private companies in general.

Financial advisors must carefully consider the risks and other suitability details in determining appropriate investments for their individual clients’ portfolios. To learn more about Ares Wealth Management Solutions, visit www.areswms.com.

Ares Wealth Management Solutions is a global brand of Ares Management Corporation.