Infrastructure Has Avoided Most of CRE’s Woes

There is no shortage of deals, plenty of investment opportunities and pricing has only been marginally affected by the rise in interest rates. Wouldn’t it be lovely if we were speaking of commercial real estate, but of course we are not. Rather, this is the takeaway from a conversation with two investment professionals that specialize in infrastructure: Andrew Cogan, managing director and portfolio manager of the Fengate Infrastructure Yield Fund, and Tara Speers, SVP of investor relations and capital formation at the company.

“Core infrastructure is a great place to be for the long term despite the noise and cyclicality of interest rates,” Cogan says. “It is a safe, well-performing space to be.”

Commercial real estate and infrastructure only occasionally overlaps, such as with wireless towers or data centers, they explain, even though the two areas could be considered close cousins. To give readers interested in learning more about infrastructure a sense of the sector, we have published excerpts of our conversation with Cogan and Speers.

Where it falls on the risk spectrum: Infrastructure is generally lower risk depending on the type of asset. For example, with super core infrastructure you can predict the performance of returns and dividends as far as ten years out. A core asset, though, would have a different risk return profile. Fengate has two funds in the super core and core space.

On the kind of returns you can expect: Super core funds get high single digit returns and the core space gets low teens. That’s because they have  slightly different risk profiles.

Who are the investors? A typical investor would be a pension fund or an insurance company. Basically an entity that has long term liabilities to offset. These funds are also attractive to these types of investors because they are so stable they lend themselves well to generating cash yield.

Competition with CRE? Our investment dollars don’t compete with CRE. Most of the funds we interact with allocate the capital for real estate, infrastructure and private equity and they tend not to change allocations very much.

On infrastructure’s tailwinds: There are a lot. There is a great deal of infrastructure backlog and the demand for new infrastructure is huge. There are a lot of assets that need a permanent home.

What the deal flow looks like: There is never a shortage of deals. We get between 5-10 deals a week.

The impact interest rates have had on transaction flow: Core and super core funds are more correlated to interest rates than other businesses, but the rising rates have affected the pricing more than the deal flow. Last year the private market was record breaking for infrastructure fund raising, but it dropped off in 2023.  The returns on those assets in the first half of the year didn’t change much. Now deals will get done but at higher returns and slightly lower prices for assets.

Is there a bid-ask gap? Yes but remember that the private market tends to adjust valuations more slowly than the public market. There is still a lot of private capital chasing high quality deals so the gap is more muted. We are starting to see a valuation adjustment though.