Australian infrastructure investors exposed to most financial risk

27 March 2022 Consultancy.com.au 4 min. read
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Boston Consulting Group has conducted a detailed assessment of the infrastructure investment landscape, building a risk-return profile for varying investor types. The first in an intended annual snapshot, investment strategies are expected to shift in the coming years.

In partnership with infrastructure investment analysis firm EDHECinfra, Boston Consulting Group (BCG) has released its first annual ‘Infrastructure Strategy’ global study report, which examines the priorities and focus of investor sub-types and their risk-adjusted performance.

Of the more than a dozen defined divisions, the ‘Australian and New Zealand Investors’ category was among the highest-performing last year, but also exposed to the greatest risk.

2021 Risk and Return Performance of Peer Groups

The impetus for the study is the renewed emphasis on infrastructure investments due to the massive funding announcements being made by major governments around the world, with private infrastructure investor assets forecast to reach $950 billion this year. Yet, “while opportunities are rife, returns from these projects vary. Some investment strategies are well suited for big gains in today’s environment; others are designed for smaller albeit consistent returns.”

For its study, EDHECinfra and BCG identified sixteen distinct investor types, grouped under four primary categories; the ‘Global Peer Group’, which included the divisions of asset owners and asset managers; ‘Asset Manager Styles’, contrasting multi-asset managers and infrastructure asset managers; and ‘Asset Owner Styles’, such as superannuation funds, sovereign wealth funds, global insurers, and North American and European pension funds.

The remaining groupings were geographic, with the Australia-New Zealand bracket (A/NZ) analysed alongside North American investors, US and Canadian investors separately, EU investors and UK investors, and those from the ‘Rest of the World’, which primarily included investors from Asia and the Middle East. The A/NZ sub-type was the third best performing among all geographies and asset management and owner types and styles.

2021 Risk-Return Profile of All Peer Groups

According to the analysts’ calculations, the A/NZ peer group last year realised a 12.85 percent risk-adjusted return, behind only the US investors sub-type (+14.02%) and North American pension funds (+14.36%). At the other end of the scale, the UK investor division achieved a return of only 7.34 percent.

Yet, the investing contrast between the A/NZ and UK groups was readily apparent, with each sitting at opposite ends of the scale in terms of volatility.

Here, the report states that North American pension funds earned the top ranking by having a performance-focused portfolio, allocating more of their investments to merchant assets (such as power plants and transport companies), while the A/NZ cohort also performed well because of exposure to riskier segments, although their mix included significant exposure to transportation investments, at around 40 percent of the total, and less so to the energy segment.

Infrastructure investments by industry by investor type

Ranked over a three-year performance period, Australian investors would come in last, due to this high exposure to transportation and in particular airports and the hit from Covid-19 on commuting and air travel – such that the impact of the post-Covid recovery on asset prices largely explains last year’s rankings.

As to the future, the survey revealed a growing appetite for speedier value creation, a shift in strategy likely to take hold over the next three to five years.

The authors note that while in general infrastructure investors have traditionally made immediate gains less of a priority, looking rather at the long-term growth on big infrastructure projects such as major roads, there is now a perception of increasing volatility – a trend which will be exacerbated by major shifts such as digitisation and the energy transition – such that longer-term hoped-for returns over a strategy of consistent operational value creation is no longer viable.