KKR flags a pivot to real assets within uncertain market conditions

Fri 15 Jul 22, 5:00pm (AEST)
Source: interconnecting freeways

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Key Points

  • Investors are pivoting towards real assets with serious pricing power
  • Unlisted infrastructure returns have consistently outperformed Australian shares since 2009
  • An inflation pass-through mechanic is evident within the the revenue line of infrastructure assets

US-based private equity company, Kohlberg Kravis Roberts (KKR) is currently witnessing a pivot by the company’s investors into infrastructure assets which are expected to weather rising prices better than most other sectors, especially within highly uncertain market conditions.

The company’s global head of core infrastructure Tara Davies attributes this pivot to what she describes as the 'inflation pass-through mechanic' that’s evident within the revenue line of infrastructure assets (aka real assets).

“A lot of infrastructure assets tend to catch up with inflationary conditions over time,” notes Davies.

“While infrastructure as an asset class may been seen by investors as boring, it’s important to remember that the sector still has to adapt to the needs of people and service them in different ways."

Still 50% in corporate hands

As a by-product of private equity entering the infrastructure sector over the past 20 years, Davies notes the sector has by default become more competitive and more broadly defined.

Despite the flow of private capital into this market, Davies suspects around 50% of infrastructure assets still sit in corporate hands.

Public-to-private has been a big theme within the infrastructure over the past year. But what’s also evident notes Davies is that certain businesses within the infrastructure space have the wrong type of capital for the objectives they’re trying to achieve.

Unsurprisingly, this only adds to private equity interest in picking off infrastructure assets that remain listed entities.

Margin squeeze

Within the last six months, Davies has witnessed a change in the way the market looks at deals.

While growth businesses are much trickier within current market conditions, Davies reminds investors that companies without real pricing power will see their margins squeezed, especially in light of tight employment conditions, supply chain issues, and rising costs within underlying capital expenditure.

The benefits of having infrastructure in your portfolio

According to data from asset manager Invest Unlisted, Unlisted infrastructure returns have consistently outperformed Australian shares since 2009.

As a result, large institutional investors, like super funds have been quietly acquiring some of Australia’s largest infrastructure assets over the past two years.

As a case in point, in February, AustralianSuper was part of a consortium that acquired Sydney Airport through a $23.6bn takeover.

Slim pickings

While giant toll-road operator Transurban Group (ASX: TCL) is one of a handful infrastructure stocks still listed on the ASX, there’s constant speculation that they’re primary takeover targets, especially while the assets remain attractively priced.

Nevertheless, investors can still get access to infrastructure assets and if AustralianSuper’s returns from infrastructure assets in 2021-22 (12%) are any proxy, this is a good place to be.

By comparison, Morningstar data shows the top-performing infrastructure managed funds returned 10-15% over one year.

What’s on offer

Funds in the unlisted space include Invest Unlisted’s Core Infrastructure Fund.

Then there’s the FTSE Global Core Infrastructure 50/50 Index, which returned 13.2% over one year to end-June 2022.

The ASX also has three infrastructure ETFs:


Written By

Mark Story


Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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