EDHECinfra Post
Infrastructure prices don’t show a bubble
Publication date: 2019-03-01

This blog was initially published in top1000funds.com.

No asset is an island…

Infrastructure equity prices do not exist in a vacuum. Analysing hundreds of transactions over the last 15 years, we found that they are driven by systematic risk factors, which can be found across asset classes. In other words, markets did process information rationally and average prices did reflect buyers’ and sellers’ views and preferences for taking risk.

These risk factors (size, leverage, profit, term spread or value) are commonplace for sharemarket investors. After all, unlisted infrastructure equity is still equity. As a result, unlisted infrastructure prices have typically showed some correlation with with public markets over the last 15 years.

…but illiquidity made it tough to see what was going on

The price formation process happened almost in slow-motion, however, because of the illiquid nature of the unlisted infrastructure market.

The raw data shows unlisted infrastructure companies such as ports, airports and merchant power, experienced a sharp drop in revenue in 2009. But unlike stocks, the effect on valuations was not immediate because few transactions took place at the time. This shock to revenues and earnings impacted transaction prices only later on.

Then, in 2011, despite revenue growth being either stable or still declining, average infrastructure valuations began rising rapidly. This continued until 2016. Not all sectors peaked at the same time. For instance, the power sector started a new price decline in 2015. In contrast, airports had their highest average valuations increase in that period. By 2017, despite the return of revenue growth, average prices had plateaued. This shift stemmed mostly from the impact of the leverage factor (an increase in the price of credit risk) and of rising interest rates.

But the price action wasn’t reminiscent of past bubbles

This decade of price increases reflects a normal process of price discovery. Prices increased rapidly as more investors entered the market. Buyers and sellers discovered how much they were willing to pay for infrastructure assets. During this period, the risk preferences of the average buyer of private infrastructure companies also evolved, leading to lower required returns for infrastructure investments.

Today, we may have reached a price consensus. ‘Peak infra’ may even have occurred two years ago, as valuations followed a steadier path.

Of course, there are always exceptions to price increases. Vinci’s recent acquisition of a majority stake in Gatwick airport valued the London property at eight times revenues. However, the data suggests that an average airport should sell for 2.5-3 times revenues. But not everyone may agree that Vinci paid a fair value price for Gatwick.

A new era lies ahead

We are on the cusp of a new era for infrastructure valuations. These businesses are expected to deliver steady and predictable cash flows and, to the extent that this is the case, they should be expensive. Prices will continue to evolve more rationally as more informed buyers and sellers engage in a steady stream of transactions in the most active markets.

This is good news for investors who have been looking to infrastructure for stable, long-term investments. Unlisted infrastructure shares some drivers with listed equity, but it remains partly decorrelated from public markets. It also offers a visible track record of steady and significant dividend pay-outs. The infrastructure investment narrative still holds.

With the period of easy returns driven by ever-increasing valuations coming to an end, a new era of risk management can begin for infrastructure investors. This new paradigm requires better measures of risk and of the contributions infrastructure assets make to the total portfolio.

Do NOT follow this link or you will be banned from the site!


  • The information contained on the EDHECinfra website (the “information”) has been prepared by EDHECinfra solely for informational purposes, is not a recommendation to participate in any particular investment strategy and should not be considered as an investment advice or an offer to sell or buy certain securities.

    All information provided by EDHECinfra is impersonal and not tailored to the needs of any person, entity or group of persons. The information shall not be used for any unlawful or unauthorised purposes. The information is provided on an “as is” basis.

    Although EDHECinfra shall obtain information from sources which EDHECinfra considers to be reliable, neither EDHECinfra nor its information providers involved in, or related to, compiling, computing or creating the information (collectively, the “EDHECinfra Parties”) guarantees the accuracy and/or the completeness of any of this information.

    None of the EDHECinfra Parties makes any representation or warranty, express or implied, as to the results to be obtained by any person or entity from any use of this information, and the user of this information assumes the entire risk of any use made of this information. None of the EDHECinfra Parties makes any express or implied warranties, and the EDHECinfra Parties hereby expressly disclaim all implied warranties (including, without limitation, any implied warranties of accuracy, completeness, timeliness, sequence, currentness, merchantability, quality or fitness for a particular purpose) with respect to any of this information.

    Without limiting any of the foregoing, in no event shall any of the EDHECinfra Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits), even if notified of the possibility of such damages.

    All EDHECinfra Indices and data are the exclusive property of EDHECinfra. Information containing any historical information, data or analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. Past performance does not guarantee future results. In many cases, hypothetical, back-tested results were achieved by means of the retroactive application of a simulation model and, as such, the corresponding results have inherent limitations.

    The Index returns shown do not represent the results of actual trading of investable assets/securities. EDHECinfra maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. Back-tested performance may not reflect the impact that any material market or economic factors might have had on the advisor’s management of actual client assets.

    The information may be used to create works such as charts and reports. Limited extracts of information and/or data derived from the information may be distributed or redistributed provided this is done infrequently in a non-systematic manner. The information may be used within the framework of investment activities provided that it is not done in connection with the marketing or promotion of any financial instrument or investment product that makes any explicit reference to the trademarks licensed to EDHECinfra (EDHECinfra, Scientific Infra and any other trademarks licensed to EDHEC Group) and that is based on, or seeks to match, the performance of the whole, or any part, of a EDHECinfra index. Such use requires that the Subscriber first enters into a separate license agreement with EDHECinfra. The Information may not be used to verify or correct other data or information from other sources.

    The terms contained in this Disclaimer are in addition to the Terms of Service for users without a subscription applicable to the EDHECinfra website, which are incorporated herein by reference.

    This site uses cookies to deliver the services you request, improve user experience and measure audience. By continuing to browse our website, you are consenting to our use of cookies. Find out more about this in our Privacy policy.

  • X