- eFront’s latest data shows that infrastructure funds in Europe outperform North American vehicles in terms of average performance
- eFront, the leading financial software and solutions provider dedicated to Alternative Investments, has published its latest research, showing that infrastructure funds globally deliver strong performance over long time periods, at low levels of risk.
- On a pooled average basis, European infrastructure funds provide some of the highest returns, with a TVPI of 1.43x, compared with 1.32x for North American funds and 1.38x for all funds globally.
- European funds also offer low levels of risk; even bottom quartile fund generates the positive performance of 1.09x, while the worst performing fund delivers 0.94x.
- Globally, the bottom quartile fund reaches 1.16x, with no vintage year showing a performance of a bottom quartile fund below 1.05x.
- Funds belonging to the bottom 5% lost capital on aggregate, with a TVPI of 0.90x, but even here, more than a third of vintage years do not bear a loss of capital even for the bottom 5% of funds.
- Infrastructure funds are typically created for 13 to 15 years and their average holding periods are seven to eight years.
On a pooled average basis, European infrastructure funds provide one of the strongest returns globally, with a TVPI of 1.43x, compared with 1.32x for North American funds and 1.38x for all funds globally (see Figure 1). European funds also offer a low level of risk; even funds in the bottom quartile show a positive performance, reaching the threshold of 1.0x and showing a range of 0.94x to 1.09x. By comparison, the bottom quartile of LBO funds sits at 0.72x to 1.12x.
Source: eFront Insight, as of Q2, 2019
On aggregate globally, the pooled average TVPI of private infrastructure funds is of 1.38x and the median 1.33x. The bottom quartile fund delivers 1.16x. None of the vintage years tracked by eFront Insight shows a performance of bottom quartile funds below 1.05x. Even in the world of private real assets, this is an impressive achievement.
However, investing in private infrastructure funds still bears some risks. Not surprisingly, funds belonging to the bottom 5% lost capital on aggregate. Their multiple of invested capital is 0.90x, and of the individual vintage years tracked by eFront Insight, 63% bear a loss of capital. Still, this means that more than a third of years do not record losses on aggregate when specifically considering bottom 5% funds.
Infrastructure investing also benefits from rather predictable long-term streams of income.This does not mean that investors can avoid the usual J-curve associated with private markets investing (see Figure2). In fact, cumulated net cash flows reach -51.6% in Year 4 and, on aggregate, private infrastructure funds break even in Year 12. Infrastructure funds are created for 13 to 15 years and their average holding periods are seven to eight years. This explains the long duration of investments and the specific shape of the J-curve.
Source: eFront Insight, as of Q2, 2019
Although this could be at times analyzed as a risk, it is clear that the period during which funds show net negative cash flows is related to the long holding periods of assets. In that respect, the specific shape of the J-curve and the long duration are not a risk associated with infrastructure investing, but a dimension of this type of investment.
The logical conclusion is, therefore, that historically private infrastructure funds have shown fairly resilient performance and a very low loss ratio. However, they require a lot of patience and the ability to handle net negative cash flows for a fairly long time. One of the risks associated with infrastructure investing can appear from a sudden mismatch between the long commitment of an investor and an immediate need of capital. Another risk is that as infrastructure investing gains popularity, past performance and risk assessments become less relevant. As assets mature slowly, changes might appear later than in other private markets.
For the full report, click here.
Is now a good time to consider art as an investment?
By Anita Choudhrie, Founder of Stellar International Art Foundation
Back in April, as Covid-19 began to have a significant impact on museums and galleries across the world, the Association of Art Museum Directors described it as a “crisis without precedent”. Now, nearly seven months on, the re-introduction of lockdown measures and the uncertainty around the looming Brexit deadline continue to undermine the art market.
Many small and medium sized galleries were already facing an uncertain future before the pandemic. Now, this has only been exasperated, with auction sales postponed, art fairs cancelled and galleries having to shut their doors for the second time this year. According to a survey by Art Newspaper, UK galleries are expecting a shocking 79 per cent fall in revenue in 2020.
With such market uncertainty, it is understandable that collectors may be feeling hesitant about whether now is a wise time to be investing in art. People are generally more cautious with their money during a period of economic uncertainty, including with their spending and investments. Naturally, this has a substantial impact on the entire art ecosystem, affecting artists and galleries, as well as the huge number of other people who make a living from the community. Moreover, during Covid-19, social distancing requirements have made it near impossible for collectors to physically inspect and transport purchases.
Art market resilience
Yet despite this hesitation, people are in fact still purchasing new works, just in a more considered and calculated manner. This is unsurprising when you consider the resilience of the art industry. In recent history there have been many other periods of precarity, including recessions, previous health pandemics and unpredicted events which have sent shockwaves through the world…but the art industry has always recovered. According to a Statista report, in 2019 the global art industry was valued at $67 billion, a stark contrast to the art market’s $39 billion evaluation in 2008 and 40 percent decline between the recession years of 2007 and 2009. It cannot be denied that COVID-19 is an unprecedented event which will have rippling effects for years to come, but it will do collectors well to remember that as we have seen before, normality will eventually resume. Whether it takes a couple of months, or even a year, the markets will recover – and once shops and restaurants re-open, holidays resume and employees return to offices, the art markets will assertively bounce back once again.
Considering art as an investment opportunity
Whilst investing in art may seem like a daunting prospect and an unnecessary expense during the middle of a global pandemic, now is a crucial time for collectors to be supporting the delicate art ecosystem wherever possible. Despite the precarious situation, artists have proven time and time again that their work can hold value during periods of economic upheaval, so there may still be wise investment opportunities to explore. For example, over the past five years, some of the most collectable contemporary art pieces have increased in value by over 160 percent. Over the past year, this same index has risen in value by nearly 5 percent, demonstrating how resilient the market can be.
In addition to this, many auction houses and galleries have set up charity sales, offering collectors an opportunity to purchase credible art at amazing prices, whilst doing their bit to keep the market afloat. Therefore, along with providing collectors with an opportunity to pick up some fantastic bargains, the pandemic is also helping to open up the art world to new, first time buyers, encouraging younger generations to become collectors as well.
The digital boom
Ultimately, the pandemic may be wreaking havoc on the world, but it is also providing the long-needed incentive for the art industry to fully embrace change. Art works have been available through multiple online platforms for years, however, the scale of investment into digital channels has rapidly expanded in recent months. For example, the renowned Galerie Thaddaeus Ropac invested extensively in state-of-the-art technology to facilitate virtual visits, starting with a walk-through of the Daniel Richter show in its Salzburg gallery.
Additionally, the organisers of Art Basel created an online viewing room dedicated exclusively to artwork produced this year. Not only did this decision give some of this century’s most overlooked artists a chance to shine in the digital spotlight, but it also opened up the exhibition to a much broader audience than ever before.
Although the pandemic has forced the industry’s hand, total online sales have risen from a 10 percent share of the business market in 2019 to over 35 percent in the first half of 2020. The importance of this shift in making art more accessible to everyone and in turn, supporting the industry to stay afloat, cannot be overlooked. This online market growth also demonstrates how there is still significant demand among buyers, and therefore, that the art market isn’t going anywhere anytime soon.
Ultimately, with the global economy currently disrupted and with no real indication of when ‘normality’ will resume, it is understandable that collectors may be treading carefully with their next purchase. Yet as we know, art has long proven to be a stable investment, often outperforming other asset classes and weathering the most difficult of global financial storms. Of course, every collector’s situation is different, but there are certainly great deals to be had across the entire spectrum of the art market; whether you are in the fortunate position to invest in fine art, or are looking to make your first purchase from the emerging category.
The Stellar International Art Foundation:
Established in 2008, The Collection has become internationally renowned for its content, coverage and activities around the globe and is a particular champion of female artists and feminist art. Currently the foundation comprises over 600 works dating from the late 19th Century to the present day, including international artists and ranging from sculptures to paintings. It distinguishes on individual talent rather than regions and gives an insight into the cultural viewpoint of individuals with diverse understandings of the world.
For more information, please visit: https://sia.foundation/
High yield value trap: party over for high yield bonds as risk no longer rewarded
High yield bonds are no longer rewarding duration and credit risk correctly, argues RWC Partners’ Justin Craib-Cox, and investors should consider using convertible bonds to earn equity-like returns as volatility continues to affect markets.
Following an initial widening, high yield bond spreads quickly tightened in the wake of the initial coronavirus crisis, despite signs that economies have a long way to go and there may be more stress to follow.
With high yield bonds offering under-appreciated risks in the current environment, investors should look elsewhere for debt that has equity-like returns according to Craib-Cox.
“Bond markets are at a turning point, where taking credit and duration risk will not be rewarded as it was in the past,” says Craib-Cox.
“High yield bonds have enjoyed very strong risk-adjusted returns in recent years. That is because the environment has been broadly supportive, thanks to low rates, minimal interest burdens and muted volatility of outcomes. And with investors in need of income and having to allocate more to high yield, it becomes a sort of circular arrangement.
“So why was this period so good for high yield? Simply put, massive monetary support from central banks pushed interest rates lower and dampened volatility, and those conditions helped to limit defaults in high yields while pushing bond prices higher.
“Plus, risk preferences and an aging global demographic created more demand for bonds, providing a steady bid for more speculative credit. In other words, the bet of loaning money to shaky companies worked fine in this period, given that high yield issuers were largely able to repay or refinance their debts.”
But where the market stands today in the ‘New Normal’ is clearly different, Craib-Cox believes.
“Asset price volatility has increased with the more uncertain future following the Covid-19 pandemic, even with rates staying low and governments pledging fiscal support. Corporate defaults, particularly in the US, have crept up even before the coronavirus crisis began.”
Speculative-grade corporate default rates
“The rapid spread of the pandemic caused a massive widening in credit spreads in March and April 2020, and a subsequent loss of capital for the sub-investment-grade bond market. As such, high yield does not look like a bargain anymore, with spreads recovering to pre-lockdown levels while the probability of defaults has plainly increased.”
“In a world of low rates and low volatility, issuers used the high yield markets with carefree abandon and no concern for extra leverage. Now that volatility and uncertainty have returned, simply adding another layer of debt to get through a rough patch doesn’t make as much sense.
“Overleveraged issuers are facing conditions vastly different to those they assumed when taking on debt, and investors accustomed to low defaults from this market are thinking again about exposure to this asset class.”
Craib-Cox argues investors in high yield bonds that have the flexibility to earn return through embedded equity options should consider convertibles, which have outperformed high yield this year.
Convertibles vs High Yield
“While high-yield bonds are a one-way bet that a speculative issuer will not default, the embedded option to convert gives positive returns if stocks rally, but limited downside thanks to a bond floor.
“These structural features helped convertibles to outperform high yield, both when markets sold off in early 2020, and during the rally that began in April 2020.”
“In fact, from the year’s lows, convertibles recovered to pre-lockdown levels more quickly than high yield, and as of the end of September, convertibles are positive for the year while high yield remains negative.
“Issuers too are now choosing to use convertibles, with a record amount of issuance in 2020. Convertibles are being issued by companies that may be the stronger operators in a temporarily challenged sector, or looking to finance growth prospects, particularly in sectors such as IT where the pandemic has created opportunities in areas such as distance working and learning.
“With less representation from highly leveraged or cyclical sectors, many investment grade or equivalent convertible bonds, and a growth aspect to many issuers, the sector composition of the convertible market is also quite different to high yield, with potential diversification for credit.”
Investing for Infrastructural Resilience
Today, the concept of resilience is applied in a range of contexts from ecology and disaster management to cyber security and engineering. The notion of resilience has been at the forefront of discussions around the global post-Covid-19 recovery and our collective efforts to build back better.
For impact investors, this means directing our capital allocation and stewardship activities towards solutions that can drive systems change and transformation. At Tribe, we divide our range of resilience-based investment opportunities into three categories: infrastructural, planetary and human resilience.
In this article, we focus on Infrastructural Resilience. The investments are designed to strengthen our man-made environment and improve its capacity to withstand the various potential social-ecological disruptions on the horizon.
Digital technology and software has the unique ability to support the delivery of all 17 UN Sustainable Development Goals (SDGs). Digital technologies increase our capacity to connect and communicate, supporting engagement with political, educational, healthcare, and other welfare-based systems.
Moreover, digital innovations like Artificial Intelligence (AI) enable us to monitor and understand with greater clarity the changes unfolding in the world around us, so that our responses can be more targeted and precise. The rise of smart, connected devices and big data capabilities allow us to analyse and optimise our resource use, bringing significant efficiency benefits. Digital technology and software are also a critical element of crisis management, as we have witnessed during the Covid-19 pandemic with the successful shift to remote working for many.
Our conventional modes of construction are set for reimagination as buildings currently account for roughly 39% of global energy-related carbon emissions as well as significant volumes of water and material consumption. Numerous initiatives have been developed to promote the delivery of resource efficient buildings and refurbishments.
Technologies like high performance insulation, natural ventilation and heat recovery systems, natural daylighting systems, greywater recycling and onsite renewable power generation, can be used to significantly reduce the operational resource footprint of buildings. Digital innovation also has a role to play in smart energy and water management systems which can drastically improve resource efficiency.
Buildings made from conventional building materials, like cement and concrete, also account for significant amounts of embodied carbon. A wide range of bio-based, renewable and recyclable materials show promise as alternative building materials, from bamboo to seaweed. These alternative materials are effective at locking in sequestered carbon and supporting biodiversity during their growth.
CLEAN AND RENEWABLE ENERGY & TRANSPORT
There are infrastructural shifts in support of renewable energy generation and low-carbon transportation which will be critical enablers of cross-sectoral decarbonisation, to bring us in line with the 1.5°C warming goal outlined in the Paris Climate Agreement.
Renewable energy generation allows us to move away from pollutive fossil fuels and instead power our lives and economies in a cleaner, more affordable way. Renewable energy sources continue to prove increasingly cost-effective and efficient across a range of technologies, including solar PV, onshore and offshore wind and geothermal power. Moreover, advances in battery energy storage and smart grid technologies show promise for improving efficiency and balancing out the intermittency issues inherent in harnessing natural elements like sunshine and wind.
The electrification of the transport sector is another essential infrastructural shift, and one that relies on affordable and reliable access to renewable power in order to deliver decarbonisation benefits alongside reductions in ambient air pollution. Innovations in vehicle-to-grid technology highlight the potential for electric vehicle batteries to help balance out power supply and demand while charging, which will enable the integration of more renewable power into the electricity grid. In addition to electrification, innovative fuels like green hydrogen could become feasible solutions for the decarbonisation of harder to abate transport sectors like shipping and aviation. Meanwhile, connected and autonomous vehicles could help to shift us towards a more efficient ride-sharing economy, while improving road safety and reducing air pollution.
This range of opportunities demonstrates the scope we have to truly build back better. Sourcing investments which drive change and improve efficiencies in our man-made environment is at the heart of our focus on Investing for Infrastructural Resilience
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