In a year where global stocks and bonds lost more than $30tn[1] on account of high inflation, rising interest rates, and the ongoing war in Ukraine, unlisted infrastructure equity has fared well. Private infra debt finished the year slightly better off than corporate bonds but still heavily impacted by the rise of market yields.

The infra300® index, which tracks a representative global sample of unlisted infrastructure equity investments worth close to $250bn, ended the year with a 4.92% total return in local currency (despite a -1.5% return in Dec 2022). As interest rates fluctuated throughout 2022, it turned out to be highly volatile year with month-on-month total returns ranging from -5.82% to 10.13%. At the end of 2022, the average Ev/Ebitda ratio of the global infrastructure market stands at 12.98, considerably lower than a year ago due to higher market discount rates, but a strong cash yield of 11.5% delivered a positive total return for the infra300 index. In comparison, the S&P global equity broad market index lost 18.24% in 2022 and offered a cash yield of 1.8%.

On the credit side, yields increased sharply in 2022 and, as a result, EDHECinfra’s flagship debt index, the infra300® Debt index, is down by 11.87% in 2022 (local currency). This index represents the performance of the most recent senior debt instruments issued by the constituents in the infra300® equity index. It includes 370 senior debt instruments with a market capitalisation of $94bn after a drop of $8.5bn from a year ago. In comparison, the S&P Global Developed Sovereign Bond index has returned -12.66% in 2022. Long term infrastructure debt index was affected the worst by the rise in yields because of its longer duration and returned -21% in 2022 (local currency).

Among the peer group strategies, Australian investors in unlisted infrastructure equity have outperformed their peers from other regions in 2022, helped by their greater exposure to transport infrastructure companies. The infrastructure strategy 2023 report by BCG and EDHECinfra will be launched in March 2023 and provide a comprehensive comparison and ranking of 16 such peer groups.

Analytics in infraMetrics offer further insights into the valuation and risk drivers of the infrastructure market. After increasing by 54bps in the first half of 2022, the equity risk premium of global unlisted infrastructure equity is down for the year by 27bps on account of higher profitability and smaller interest rate term spread. The rise in interest rates remains the most significant factor impacting discount rates and valuations. However, the reduction in risk premium, combined with higher inflation-linked cash flow forecasts, offset close to half of the negative interest rates’ impact on the valuations in 2022 according to infraMetrics DCF analytics.

As a whole, private (unlisted) infrastructure companies showed a strong growth in revenues of almost 10% over the last 2 years, as they recovered from the Covid-19 crisis. Going forward, however, revenues are expected to grow at a slower average pace of 2.5% in the next 2-years, in line with the historical average across all TICCS segments. Comparing business models as defined by TICCS®, companies with a merchant risk profile are expected to see revenues grow faster at 3.4% over the next 2 years. They were also the strongest performers in 2022 and contributed 3.29% to the total return of the infra300 index.

By corporate structure (TICCS® 4^th pillar), majority contracted project financed companies, contributed 2.95% to the infra300 index total return in 2022. Equity risk premia data in infraMetrics data shows that the project financed companies have much lower risk as compared to the corporate infrastructure companies. The equity risk premia dropped across all the infrastructure sectors in the second half of 2022, with Transport (IC60) and Pipeline companies (IC40xx) seeing the largest drop and becoming the biggest contributors to the infra300 index performance in 2022.

Average discount rate in core infrastructure market increased from 6.5% to 8.7% in 2022, even though the equity risk premium dropped by 50bps. As a result, the infra100® Core index ended the year in negative territory at -1.68% (local currency), underperforming the infra100® Core+ companies which had a total return of 3.4% in 2022.

The yield-to-maturity for the global infrastructure debt market skyrocketed to 6% in 2022 after an increase of 330bps. However, the credit spreads have increased by only 60bps in 2022 and expected loss has gone up by just 10bps over that period. It shows that infrastructure debt remains of high quality and low credit risk, despite the rise in yields, bulk of which is simply due to the rise in interest rates (yield of UK 10y gilt[4] has increased by 280bps in 2022).

The credit spreads have increased more in corporate infrastructure companies and, as a result, the average spreads in project financed and corporate infrastructure debt market are now quite close at 212bps and 205bps respectively. Among the industrial activities, social infrastructure debt is priced most competitively at an average credit spread of 188bps, and the credit spreads are the highest in transport infrastructure debt at 226bps.

References: 

[1] https://www.ft.com/content/87ed8ea6-4913-4452-9135-498040ad338f

[2] https://www.spglobal.com/spdji/en/index-family/equity/global-equity/#overview

[3] https://www.spglobal.com/spdji/en/indices/fixed-income/sp-global-developed-sovereign-bond-index/#overview

[4] https://www.bankofengland.co.uk/boeapps/database/index.asp?Travel=NIxIRx&levels=1&XNotes=Y&A4058XBMX4051X4052X4053.x=5&A4058XBMX4051X4052X4053.y=6&Nodes=X4051X4052X4053&SectionRequired=I&HideNums=-1&ExtraInfo=true

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