Private Infrastructure as a Potential Inflation Hedge

Private infrastructure assets demonstrated this characteristic during the turbulent first half of 2022. Private infrastructure companies tracked in the EDHECinfra3001 index declined 5.2% through the first half of 20222, which compares favorably to major public equity indices such as the S&P 500 which declined 20.6%3 during the same period. Infrastructure assets also demonstrated attractive performance relative to similar-duration fixed income benchmarks such US government debt, which declined 10.8%4 in the first half of 2022. The fundamental driver of private infrastructure’s resilience during periods of high, unexpected inflation, based on our analysis, is the asset class’s ability to increase cash flows as inflation rises.

Rising Rates Impact Different Infrastructure Assets Differently

While infrastructure assets that face more of a lag or that have longer duration may experience declining valuations early in an inflationary period, there is good reason to believe that they may provide an opportunity for those seeking an (opportunistic) inflation hedge. These assets have tended to experience a short-term, negative impact in valuation due to the uncertainty in the length of the lag in rising cash flows. As this uncertainty dissipates, and visibility for rising cash flows improves, those high-quality, long-duration assets may revert, thus increasing in price as valuation discounts are reversed. A key takeaway from our analysis is that high inflation is likely to impact different infrastructure assets differently, and these differences may benefit investors who understand how to take advantage of them.

Growing Opportunities for Infrastructure

To that end, given high inflation levels, we believe that current conditions may widen the market opportunity for private infrastructure assets in both the primary and secondary markets. In addition to the effects on the short and long-term valuations of infrastructure assets, we believe that rising interest rates may constrain federal and local governments’ ability to invest in new projects or continue to fund existing infrastructure commitments. As a result, these governmental bodies may increasingly turn to private sources of capital or even divest from current infrastructure assets. This strain on governments comes at a time when significant investments in infrastructure will be required to support forward economic growth. Therefore, we believe that the supply of private infrastructure assets may increase markedly going forward.

We believe this report will serve to remind readers of the fundamental drivers that have underpinned the development of this asset class and that it will illustrate the widening opportunity set that we believe will unfold in both the primary and secondary markets in the years to come.