Infrastructure in Focus

Attractive dynamics in unlisted infrastructure assets make them a compelling proposition for investors looking to add a defensive component to a well-diversified portfolio.

Alternative assets serve a number of important roles in portfolios. There are two broad categories of alternatives: growth alternatives and defensive alternatives.

Growth alternatives

Growth alternatives include private equity and venture capital. These typically provide exposure to parts of the economy that are either poorly represented in public equity markets or not represented at all. The private equity market has changed significantly in recent years and, in our view, is now essential for investors seeking a well-diversified exposure to high returning assets.

Positive outlook for private equity

Private equity has had a subdued few years given macro uncertainty and high interest rates. Funds have struggled to realise assets since there has been no new issuance on stock markets. Nevertheless, there are real long-term opportunities in clean energy, AI, digitisation and growing healthcare needs. There has been an increase in the number of funds on offer in Australia and structures are now more investor friendly. Meanwhile, newer funds might be able to take advantage of distressed situations and be well-positioned to allocate money to growing companies at the start of a new cycle.

Defensive alternatives

Defensive alternatives include less volatile assets that should provide a more stable source of return over time, or which are lowly or negatively correlated with traditional asset classes. They include infrastructure investments, private credit, hedge funds, commodities, gold and long-short funds operating in equity or bond markets.

Attractive infrastructure

Our preferred defensive alternatives are unlisted infrastructure and private credit. Unlisted infrastructure funds typically have large exposures to transport infrastructure such as airports and freight terminals where volumes are strong as conditions normalise after COVID. Many assets also have inflation protection due to CPI-linked pricing which makes them particularly attractive at present.

The trend to private credit

The private credit market has rapidly expanded in recent years. This partly reflects growing regulatory pressure on banks that is constraining their ability to lend. 2023 was a particularly strong year when there was some pressure in listed credit markets. There is now a range of funds available with differing sector, duration and risk profiles.

All that glitters

We have been reducing exposure to gold in portfolios. Our previous position was based on its safe-haven characteristics. But we now see government bonds as better safe haven assets so we have been reducing gold holdings. Higher interest rates are also a negative for gold because they increase the opportunity cost of an asset that has no income stream.

Global Private Capital Raised

Global Private Debt