Is Infrastructure Overvalued? The Biggest Allocators Don’t Think So.

Early this year, BlackRock acquired Global Infrastructure Partners, one of the world’s biggest independent investors with $100 billion in assets in roads, airports, utilities, and other projects. It was BlackRock’s largest acquisition in 15 years, and a sign of increasing interest in one of the fastest growing areas of private markets.

In his annual letter two months later, BlackRock chairman and CEO Larry Fink highlighted the $1 trillion global infrastructure market and investor demand for the asset class. And the world’s largest asset manager was preparing to capitalize on that; the deal to buy GIP tripled BlackRock’s existing $50 billion infrastructure business to $150 billion. “In my nearly 50 years in finance, I’ve never seen more demand for energy infrastructure. And that’s because many countries have twin aims: They want to transition to lower-carbon sources of power while also achieving energy security,” he wrote.

Just five years ago, the infrastructure market was barely $500 billion. Today, the asset class is on everyone’s radar and big equity windfalls will be harder to achieve. Some research suggests the market is overvalued now, but there are still powerful tailwinds that will keep infrastructure attractive going forward, according to the second annual report on the market expected to be published tomorrow by Cornell University’s Program in Infrastructure Policy and Hodes Weill & Associates, a capital advisory firm.

“We believe that the combination of abundant capital, global government support, and anticipated rate cuts, along with the benefit of the asset class’s ‘inflation participation,’ are likely to sustain current valuation and financing metrics, including discount rates. This perspective does not downplay the risks of prolonged high interest rates or slow economic growth but highlights a crucial consideration for industry participants,” the university and advisory firm’s 2024 Infrastructure Allocations Monitor says.

The CPIP program surveyed 102 institutional investors in 20 countries with a total of more than $8.2 trillion total assets under management and investments in infrastructure exceeding $350 billion. It found the group continues to invest more in the asset class — and still might be underallocated to it.

In 2024, the average target allocation to infrastructure grew by 42 basis points to 5.5 percent in 2024. Especially high target allocations in the Americas of 8.1 percent was driven by Canadian institutions, which reported an average of 12.6 percent, up from 8.9 percent in 2023. Canadian institutions, like peers in Australia, have long been big investors in infrastructure and others around world are beginning to follow suit. In the U.S., the average target allocation grew to 5.4 percent in 2024, an average now higher than the institutions in Europe, the Middle East and Africa (4.3 percent) and Asia Pacific (5.2 percent) regions.

Investors view infrastructure as a way to enhance the diversification of their portfolio. Recently, they saw the value of infrastructure through turbulent markets, and rising inflation and interest rates. Real assets can provide those things and something like an airport or utility company has — or should have — a special level of stability and permanence.

Nevertheless, institutional investors aren’t investing in infrastructure as much as they would like to. The survey respondents were meaningfully under-allocated to the asset class. Globally, institutions are an average of 1.23 percent short of their target allocations. Investors in EMEA were the most under-allocated, currently 1.60 percent below their target. Public and private pension funds reported the greatest percentage of institutions currently under-allocated; with 63 percent and 64 percent of institutions, respectively. Responses from insurance companies were more balanced, with 60 percent at target allocation. Meanwhile, 18 percent of sovereign wealth funds and government agencies said they were over-allocated to infrastructure.

“These findings underscore the ongoing complexities and variances in infrastructure investment strategies across the global institutional landscape,” the report says. As an asset class, one of infrastructure’s biggest challenges is the nascent benchmarking related to it. “I look at this report as a tool to help solve for that. I think it’s a good reference point for investors that haven’t been investing in infrastructure, or that have been investing in infrastructure for a long time, or that might have just started investing in infrastructure or contemplating an investment in infrastructure going forward,” Mark Rudovic, a principal and the head of Real Assets at Hodes Weill & Associates, told Institutional Investor.

As interest rates have increased, investors have shifted how they get exposure to infrastructure, rotating from the core assets most people think of — electric, gas and water networks, toll roads, bridges, and railroads — to infrastructure debt. Pension funds and others are also investing more in higher risk, higher returning strategies such as renewable energy assets and non-regulated airports. Limited partners are the ones asking for the latter and asset managers have been responding and offering more of those investment opportunities, Rudovic said.

“Being measured and being smart about what you’re putting into your portfolio is top of mind for me and should be for institutional investors and managers that are running these products,” Rudovic said. “You want to make sure the range of outcomes isn’t so high and you can isolate risk in a value-added product to make it acceptable for an infrastructure investor.”