Longer term interest rates more relevant for infrastructure
Private infrastructure equity was up ~10% in 2022, and is currently up ~4% in 1H23, according to both MSCI and Burgiss. However, the resilient performance has only attracted some skepticism around valuations.
Critics argue that under the current interest rate pressures, infrastructure discount rates should also adjust upward, which means valuations should come down. Yet recent performance remains positive, and the asset class has not seen widespread write-downs.
In our view, investors are currently too focused on the dramatic increase in the front end of the yield curve. For example, they often point out that 12-month US treasury yields have widened by 500bps.
However, infrastructure assets are long-term investments, with stable cash flows, and useful lives of 20 years or more. This means longer-term rates are more relevant to Infrastructure assets as a gauge on cost of capital, and these term rates have not increased as dramatically as short-term rates.