The past ten to 15 years in the US infrastructure market have been disappointing despite the scale of the market and its well-recognised need for investment. Given the current municipal or state funding models for most US infrastructure, the opportunities available to institutional investors have been limited and the market has remained fairly stagnant. Therefore, it wasn’t a big surprise to those of us in the sector that Donald Trump’s proposed changes – one of the bullish, business-friendly projects fuelling the equity rally – haven’t yet come to fruition. In fact, it feels familiar: Barack Obama also came to office with an infrastructure expansion plan, which was swiftly sidelined.
Nevertheless, it feels like US infrastructure’s moment has arrived. Following the excitement around Trump’s infrastructure improvement plans, global investors turned their attention to the sector. But Trump’s appointment came quite late into our own US infrastructure ambitions. AMP Capital has a strong infrastructure presence in the UK, Europe and Australia (in countries that largely have a successful tradition of public investment in infrastructure); we felt that the US was the last bastion for us and so for the past five years we have been building our team and presence here. Our recent acquisition of ITS ConGlobal, the railroad services and logistics provider, is a product of our strategic decision to buy and actively manage mid-market infrastructure assets in the US. Trump’s plan is not a major factor for us as we seek resilient assets that can be bought and managed whether political progress is made or not.
Whatever happens on the policy front, there is a structural change gradually underway. US infrastructure is severely underinvested and many assets are in noticeably poor condition.The G20’s Global Infrastructure Hub forecasts that $12 trillion needs to be invested in US infrastructure by 2040 and there is currently an estimated $3.8 trillion ‘funding gap’ for the maintenance and development required. Institutional investors are likely to be a source of this required capital.
While federal policy is tricky to predict, we have more confidence in the positive macroeconomic picture. We are bullish on US GDP over the next five to seven years, and a great way for allocators to gain exposure to this trend is to invest in infrastructure assets with a strong correlation to US GDP. ITS ConGlobal, with its business directly benefitting from increased trade and industry, is extremely correlated to US GDP. This attracted us to the asset; from a portfolio construction perspective, we had been looking to add US GDP exposure, and as freight activity reflects the economic environment, ITS ConGlobal’s revenues are accordingly GDP-linked.
Given the extra attention on the US infrastructure market and the lack of opportunities available to investors, the market is competitive. So-called “core” infrastructure assets are the traditional investment route: tollways, roads, gas utilities, ports; large public assets traded mostly between asset owners such as pension funds and sovereign wealth funds, coveted for their predictable earnings over decade-long periods. These deals are rare and highly competitive – especially rare in the US due to its less-established public private partnerships model – and aside from buying well, there’s usually not a great deal an owner can do to improve the modest inflation-linked investment returns. They can be worth their high valuations for certain institutional investors seeking liability-matching returns.
Avoiding the high competition for core assets and their restricted return profile, we prefer assets that meet our definition of ‘core plus’ infrastructure. They have many of the same attributes as core infrastructure – high barriers to entry and a stable cash flow profile, within the sector of essential services – but they are not actually a core asset such as a port or railroad. Here again, ITS ConGlobal is a great example. It’s the lubricant that makes a core asset (the railroads) work – the service-based business that handles container lifting between various modes of transport like rail, truck and ship. It is outside the definition of core infrastructure, but shares many of its advantages. The business itself is robust with a strong operating history, and we see opportunities for growth through international expansion and M&A, which has potential to add significant value in a sector ripe for consolidation.
While we are cautiously excited about the opportunities in US infrastructure, discipline is essential. We identified the investment opportunity in ITS ConGlobal more than two years before we acquired it last month. We benefit from the range of opportunities available to us as a global fund rather than a regional infrastructure fund. This allows us to be selective in a market where there is a lot of dry powder, as well as allocating strategically; for example in this case we elected to add exposure to US GDP given economic trends. As we see more value in the mid-market than in more prominent assets, we have teams on the ground around the world seeking out opportunities like ITS ConGlobal, attaining sector and geography diversification as we acquire assets with a strong return profile and potential for growth for our investors.
Dylan Foo, Head of Americas Infrastructure Equity at AMP Capital