[ASK 2022] Infrastructure benefits from inflation and population growth: Sera Global

 

Infrastructure is stronger than ever amid the current macroeconomic risks, and investors will see greater opportunities in the asset class amid the world's population growth and rapid urbanization, said Irene Mavroyannis, real asset advisory firm Sera Global's global head of the private capital advisory, practice for infrastructure, renewables and sustainable investing.

In ASK 2022, The Korea Economic Daily's biannual forum on alternative investment, Mavroyannis introduced the reasons why infrastructure stands out now more than other asset classes. She explained the characteristics of infrastructure as three “R”s: Resilience; long-Run investing horizon; and attractive risk-adjusted Returns.

Firstly, infrastructure has low elasticity of demand and high barriers to market entry, which protect pricing power and makes the asset class resilient during COVID-19. Also, infrastructure can generate stable cash flows based on long-term contracts and is more resistant to short-term market volatility. In addition, infrastructure has provided better absolute and risk-adjusted returns than traditional assets across varying market conditions and regions, the global head of private capital advisory said.

She also picked some key takeaways from the infrastructure investment amid rate hikes, inflation, climate change and demographic trends.

Rising interest rates place pressure on asset valuations, especially for long-duration assets such as infrastructure. However, historical data demonstrates that infrastructure outperforms amid interest rate hikes. 

Despite the higher discount rate due to rate hikes, rising inflation and earnings benefit from gross domestic product (GDP) growth increase asset price and cash flows. This indicates the earnings benefit is a greater positive for asset prices than a higher discount rate is negative, Mavroyannis said.

Also, infrastructure has shown great performances amid higher inflations, generating positive absolute returns as well as high profits in equities and bonds, as the asset class' cash flow is linked to inflation. Even in a high inflationary environment when growth is below average, infrastructure still outperforms due to its defensive qualities, she added.

In addition, decarbonization provides greater infrastructure investment opportunities. The global net-zero activities require radical reform of infrastructure frameworks, including decarbonization of existing assets and the creation of carbon-neutral replacements. Hence, global momentum to adapt and respond to climate change will create significant investment opportunities in infrastructure, she said.

Lastly, the world's growing middle class is accelerating urbanization and technological innovations which drive expansion in global infrastructure. 

World Bank has reported that 4.2 billion people, more than half of the global population, are living in urban areas and the number will rise to 6.6 billion by 2050. The speed and scale of urbanization need huge expansion of infrastructure, with approximately $3.7 trillion of injection in the asset class every year. There will be also a need for digital infrastructure frameworks with increasing investment opportunities, Mavroyannis added.

Irene Mavroyannis is the global head of the private capital advisory practice for infrastructure, renewables and sustainable investing at Sera Global where she is responsible for advising leading general partners, operating companies and managers of real assets on capital formation, asset management strategy, liquidity solutions and ESG. 

Sera Global is a leading global real assets advisor with over $100 billion in transaction volume to date. Sera's senior leadership has raised in excess of $300 billion of capital. The company offers a range of transformational advisory and capital raising solutions to help clients achieve sustainable growth, enhance flexibility, and meet their strategic objectives.

The firm provides integrated investment banking, capital raising and strategic advisory services across real estate, infrastructure, transition energy, digital, ESG-related strategies and investments at the crossroads of real assets and private equity. Sera is co-headquartered in New York, NY and London, the UK with dedicated offices in Los Angeles, Boston, Toronto, Frankfurt and Seoul.

Write to Jun-Ho Cha at chacha@hankyung.com
Jihyun Kim edited this article.