The Attractive Opportunity Today in Infrastructure Equities

By Leonardo Anguiano & Tom Miller | Brookfield Asset Management

We see a compelling opportunity in infrastructure equities. We believe that current listed valuations do not reflect how well positioned infrastructure companies are for cash flow growth amid strong fundamentals. As a result, we think current listed valuations offer a good entry point for a long-term allocation with potential for attractive risk-adjusted returns.

INFRASTRUCTURE VALUATIONS APPEAR INEXPENSIVE

We view today’s listed infrastructure valuations as inexpensive when considering infrastructure companies’ potential for cash flow growth and other strong fundamentals. Most infrastructure subsectors are trading in the bottom half of their historical valuation ranges, and some companies are trading near historical lows.

The historically low valuations are partly due to concerns about rising interest rates weighing on infrastructure equities. Increases in rates are often viewed as negative for listed infrastructure, as rising interest rates can help increase the discount rates used to value future cash flows, decreasing the present value of expected future cash flows. Valuations for infrastructure subsectors with long-duration, high-growth profiles have particularly suffered amid such concerns. These include certain utilities, renewables and communications subsectors. Besides rates, other factors have led to lower Global listed infrastructure companies have a long history of generating more consistent and higher cash flows than many other sectors across the broader equity market. Looking forward, we believe infrastructure companies may be poised for further strong cash flow growth amid today’s inflationary environment and opportunities on the horizon for deploying capital infrastructure performance, including regulatory uncertainty amid rising power prices in Europe.

Despite these near-term challenges, the attractiveness of current listed valuations is illustrated by a recent spate of infrastructure transactions, where listed companies have been privatized or have crystalized their values through asset sales, often at significant premiums to current valuations. These transactions show that current listed valuations may offer an attractive entry point. The table below provides a few examples.

INFRASTRUCTURE COMPANIES MAY BE POISED FOR STRONG CASH FLOW GROWTH

Global listed infrastructure companies have a long history of generating more consistent and higher cash flows than many other sectors across the broader equity market. Looking forward, we believe infrastructure companies may be poised for further strong cash flow growth amid today’s inflationary environment and opportunities on the horizon for deploying capital infrastructure performance, including regulatory uncertainty amid rising power prices in Europe. Despite these near-term challenges, the attractiveness of current listed valuations is illustrated by a recent spate of infrastructure transactions, where listed companies have been privatized or have crystalized their values through asset sales, often at significant premiums to current valuations. These transactions show that current listed valuations may offer an attractive entry point. The table below provides a few examples.

We estimate, based on our research, that roughly 70% of the investable infrastructure universe has explicit inflation protection built in via contracts and regulations, while many infrastructure companies also have pricing power due to limited competition and the relatively steady demand for infrastructure’s essential services.

We believe many infrastructure companies could also benefit from capital deployment opportunities tied to meeting the infrastructure needs of tomorrow, from energy security and energy independence to increasing data usage. Policymakers globally are seeking more stable and secure energy supplies, while also pushing forward lower emissions and decarbonization targets. Many infrastructure assets While current listed infrastructure valuations may offer a compelling entry point for a long-term allocation, we believe active management is key for helping to generate attractive risk-adjusted returns and long-term outperformance. Active managers can use their deep understanding of fundamentals to determine where the best opportunities are at a particular point in time, distinguishing between companies and sectors offering attractive value and those that trade at discounted valuations for a reason across renewables and sustainable infrastructure, global diversified utilities, and energy infrastructure are critically important to energy security and the energy transition. In addition, the build-out of communications infrastructure in response to rising data usage may be poised to benefit listed infrastructure companies' cash flows, earnings and asset values.

ACTIVE MANAGEMENT IS KEY

While current listed infrastructure valuations may offer a compelling entry point for a long-term allocation, we believe active management is key for helping to generate attractive risk-adjusted returns and long-term outperformance.

Active managers can use their deep understanding of fundamentals to determine where the best opportunities are at a particular point in time, distinguishing between companies and sectors offering attractive value and those that trade at discounted valuations for a reason.

They also can dynamically adjust exposures as needed, responding to market inefficiencies and temporary dislocations, to unlock value for investors.

We believe achieving strong, long-term returns requires a dedicated focus on the infrastructure asset class, deep expertise in fundamental research, rigorous analysis, extensive company engagement, and a global owner-operator perspective.

About the Columnists

Leonardo Anguiano – Managing Director, Portfolio Manager, Infrastructure Securities

Leonardo Anguiano has 25 years of industry experience and is a Portfolio Manager on the Public Securities Group’s Infrastructure Securities team at Brookfield Asset Management. In this role he oversees and contributes to the portfolio construction process, including execution of buy/sell decisions. Before focusing on his portfolio manager duties, he was responsible for covering European securities focusing on the water, transportation and energy infrastructure sectors. Prior to joining the firm in 2015, Leonardo worked for Santander in Madrid where he was in specialty sales covering infrastructure and utilities.? Leonardo earned a Master of Philosophy degree from Cambridge University and a Bachelor of Science degree from the London School of Economics.

Tom Miller – Managing Director, Portfolio Manager, Infrastructure Securities

Tom Miller has 13 years of industry experience and is a Portfolio Manager on the Public Securities Group’s Infrastructure Securities team at Brookfield Asset Management. In this role he oversees and contributes to the portfolio construction process, including execution of buy/sell decisions. Before focusing on his portfolio manager duties, he was responsible for covering North American infrastructure securities focusing on MLPs and the Energy Infrastructure sector. Prior to joining the firm in 2013, he worked at FactSet. Tom holds the Chartered Financial Analyst designation and earned a Bachelor of Science degree from Indiana University.

Brookfield Asset Management is an Associate Member of TEXPERS.