Source: MSCI (2021a) and EDHECinfra (2021a) as of September 2021.
Note: Risk-adjusted return is measured by Sharpe ration, which is the ratio of excess returns to the standard deviation of returns, where excess return is total return minus risk-free return.
The financial performance of infrastructure investments is a critical component of private capital interest in infrastructure as an asset class. In the case of infrastructure equities, its performance shows attractive and resilient returns for investors.
Infrastructure equities account for about 20% of infrastructure investments globally and it can be listed on the stock exchange or unlisted.
Although global equities perform better on a short-term basis, when comparing historical performance among types of equities, unlisted infrastructure equities have generated higher returns and higher risk-adjusted returns to investors than an average global equity. In particular, the Sharpe ratio for an average global equity is 0.4 historically, way lower than the 1.0 presented by unlisted infrastructure equities. This wide difference is partly because initially the potential of unlisted equity investments was not fully recognised by investors, so they offered exceptionally high risk-adjusted returns. With greater recognition of its attractive performance, investors’ demand has increased, and returns have aligned over time with its lower risk or volatility.
Still, over the previous decade unlisted infrastructure equities have provided higher risk-adjusted returns to investors than an average global listed equity. They have provided an average annualised return of 12.4% at annualised risk of 12.2%, while an average global equity provided similar return (12.5%) at a higher risk value of 13.5%.
On the other hand, listed infrastructure equities provided historically a slightly lower risk-adjusted return (Sharpe ratio of 0.32,) than global equities at (0.37). While listed and unlisted infrastructure equities are two complementary options to access returns on infrastructure as an asset class, the differences in their characteristics and investment processes culminate into widely different performance.
These results are mainly driven by certain markets. Infrastructure equity performance in developed markets is much stronger than that in emerging markets. The less attractive performance in emerging markets is due to their less mature private infrastructure markets and underdeveloped and illiquid capital markets - especially stock markets. Over a decade, listed infrastructure equities provided annualised return of 7.8% at annualised risk of 12.1% in developed markets, while in emerging markets the annualised return was just 2.4% at a risk of 15.7%.
Infrastructure equities, especially unlisted, have gained widespread recognition as a mainstream investment option over time, on account of their attractive performance in developed markets.
Risk-adjusted return is measured by Sharpe ratio, which is the ratio of excess returns to the standard deviation of returns, where excess return is total return minus risk-free return. The higher the ratio the better the risk-adjusted return.