Alternative assets valuation: Way to wealth or irrational exuberance?

Valuation was named one of the main challenges by the institutional investors in 2nd half of FY16-17 according to Preqin’s latest Alternative Assets Report. More than half of the analysed companies have expressed their concerns about pricing and valuation when it comes to alternatives. Under pressure, incumbents either pay too much for high-quality infrastructure assets, because these deals are relatively limited, or they act too quickly and buy assets that look cheap but are poor quality.

Certainly, buying overpriced or low quality assets does not sound like Franklin’s way to wealth, but in the current low yield environment any assumptions about some future returns do sound promising.

In the last four years a number of investors in infrastructure assets has increased by more than 116%. Private wealth and sovereign fund segments have particularly increased their proportion of infrastructure investments to more than 10% - 15% of their overall portfolios.


Recent announcements of Fondo de Ahorro de Panama, the sovereign wealth fund of Panama, and Saudi’s Public Investment Fund committing more than 10% of their investments to infrastructure does confirm ongoing appetite.

Insurers’ pursuit of infrastructure markets, on other hand, has slowed down in the last six months. The lack of available good quality infrastructure assets makes incumbents more hesitant. Some UK insurers and pension funds are reluctant to invest in construction phase projects with their appetite leaning more towards built assets like airports and toll roads that can deliver a quick and steady income streams. Although the UK government now supports some projects and acts as a guarantor on a number of construction schemes (by underwriting financial and construction risks), even this is not enough to boost insurers’ confidence to buy now.

Latest Prudential’s move to invest an undisclosed amount in the Continuum Wind Energy in India was reported to be trigged by the impressive quality of the assets being built by Continuum.

It is clear that quality infrastructure assets are in high demand, but are the incumbents ready to justify the gap between prices payable and economic values of the assets bought to their shareholders?.. Are shareholders aware that inflated valuations may lead to significant losses or liquidity problems in the not so distant future?.. Or in the world of chase -for -yield and aspirational bidding are investors becoming too optimistic to care about the fundamentals of valuation?..

Do get in touch if you would like to discuss any of the issues I’ve raised here.


Elena Saarbrucken |  Senior Manager, Financial Services Valuations
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