Pavilion perspective: AIF Southwest Investor’s Forum

“This conference brought together some of the most influential institutional investors in the Southwest. I was impressed by the openness of the discussions and the insights provided by the panelists.
Below are my thoughts on two sessions I found particularly interesting, and which demonstrate the challenges of infrastructure investments in our own backyard and how arriving at a common definition for an asset class still remains elusive.“

 

 William Charlton, JR, PhD, CFA
Managing Director and Head of Global Research & Analytics
Pavilion Alternatives Group, LLC.
at the AIF Southwest Investor’s Forum March 27, 2018, Austin, Texas

 

Investors struggle with U.S. infrastructure opportunities

CIO Lunchtime Panel DiscussionSome panel participants expressed a preference for investing in infrastructure outside of the U.S. for several reasons not obvious to those not active in the space.

  • One reason cited was that because many U.S. municipalities have the ability to issue bonds at low interest rates, those municipalities are unwilling to outsource infrastructure projects to third parties that would require a significantly higher rate of return, even if it resulted in the project not being initiated. The point was made that, ironically, the disparity between the municipalities’ cost of capital and third-party required rates of return results in fewer U.S. infrastructure projects being funded.  This, in turn, contributes to the general degradation of U.S. infrastructure.
  • A second reason for the attractiveness of non-U.S. infrastructure is the willingness of some foreign governmental authorities to agree to established fee escalation schedules as part of the contractual negotiation process for projects. In contrast, U.S. governmental authorities are more likely to impose a contemporaneous approval process rather than agree to pre-determined fee increases.  The case of the poor performance of U.S. toll road projects was raised as an example of the problems this approach can create.  It was noted that perhaps the best way to invest in U.S. toll roads was to buy them after the project failed for the initial investor, thereby replicating a fee escalation schedule by buying the distressed assets at a significant discount.
  • Finally, the panelists discussed that it takes substantially longer to navigate the regulatory approval process in the U.S. and there is much more uncertainty as to the final result. An illustrative example was that a project might take five to 10 years to get approval in the U.S. whereas a comparable project outside the U.S. would only take one to two years for approval.  Given the current state of U.S. infrastructure, several of the panelists expressed frustration in their inability to source attractive infrastructure investment opportunities.

Private credit interest growing but common definition lacking

Private Credit Session:  The panelists discussed their definitions of private credit to realize that private credit incorporates a wide range of distinct investment strategies covering everything from direct lending, CLOs, aircraft leasing, and royalties.  Some panel members discussed using a separate bucket to house the various strategies whereas others included private credit strategies under other categories.  As for whether panelists incorporated an illiquidity premium into their considerations, while not unanimous, the consensus was that most did not. The general tone of the panel was that many participants were active in the asset class and were increasing their allocations to it.

 

Disclaimer
The information contained herein is for general information purposes only and does not constitute investment advice. The information is a broad overview of discussions which were held at the AIF Southwest Investor’s Forum, and do not constitute the views of any specific panelist present, or of Pavilion Alternatives Group, LLC.