North American Investors and European Infrastructure
A solution for capital deployment, portfolio diversification and long-term cash flow visibility
By Jane Seto/DWS Group
When it comes to private infrastructure, North American institutional investors have considerable dry powder to allocate.[1]
The North American infrastructure market is one of the largest in the world and commonly represents the first choice for domestic investors. However, opportunities in North America are concentrated in the energy sector, and may offer limited scope for portfolio diversification.[2]
The European infrastructure market, however, may offer a solution to North American investors, supporting portfolio diversification away from energy.[3] Moreover, European assets in the core/ core plus space often benefit from mature regulatory and concession frameworks, supporting long-term income visibility. In Europe, private infrastructure returns demonstrated a stable performance[4] due to several factors, including a wider portfolio diversification potential by sector and country, and a larger availability of assets in the regulated or contracted space. In addition, North American investors allocating to European infrastructure denominated in EUR may also gain a premium from currency hedging, improving return expectations further.[5] With competition concentrated at the larger end of the market in both regions, Europe also offers a wider set of opportunities in the middle market space where we observe less competition and more sensible pricing.
The European infrastructure market, however, may offer a solution to North American investors, supporting portfolio diversification away from energy.[3] Moreover, European assets in the core/ core plus space often benefit from mature regulatory and concession frameworks, supporting long-term income visibility. In Europe, private infrastructure returns demonstrated a stable performance[4] due to several factors, including a wider portfolio diversification potential by sector and country, and a larger availability of assets in the regulated or contracted space. In addition, North American investors allocating to European infrastructure denominated in EUR may also gain a premium from currency hedging, improving return expectations further.[5] With competition concentrated at the larger end of the market in both regions, Europe also offers a wider set of opportunities in the middle market space where we observe less competition and more sensible pricing.
North American market focused on energy
Historically, transaction opportunities in North America have been concentrated in energy-related sectors. Renewables, oil & gas and power projects accounted for about 80% of the total number of transactions achieving financial close between 2009 and 2019, with the majority of these projects in the greenfield space. At the same time, transportation deals accounted for 7% of total transactions, a level materially below the European average, where transportation accounted for over 30%.[6]
Looking at the pipeline of upcoming transaction opportunities, investors interested in accessing the North American market today may continue to find limited opportunities for portfolio diversification. Although the pipeline seems more diversified than in the past, energy-related deals should still account for 64% of the pipeline, while transportation accounts for a limited 13%.[7]
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Europe: An opportunity for diversification into a mature investment environment
Europe represents a leading global market for infrastructure investment for its market size and track record, offering opportunities that range from the mature Western European countries, to the fast growing economies of Eastern Europe.[8]
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In
its report: “North American Investors and European Infrastructure”, DWS’s
Infrastructure team analyses how European infrastructure can be a solution for
North American investors when it comes to capital deployment, portfolio
diversification and long-term cash flow visibility.
To
read the full report, visit https://institutional.dws.com.
Resources:
[1]
Based on Preqin database as at 7 August 2019.
[2]
Based on Infrastructure Journal database, as at July 2019.
[3] Based
on Infrastructure Journal, as at June 2019.
[4]
Based on Preqin, “Preqin infrastructure Funds Statistics Database”, as at
September 2018, Notes: Infrastructure fund of funds and secondaries have been
removed.
[5]
Based on DWS proprietary methodology estimating hedging costs on the basis of a
three year interest rate swap differential between currency of investor
domicile and currency of investment destination, as at 7 August 2019.
[6] Based
on Infrastructure Journal, as at July 2019.
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