Real asset investment gets proactive
25 March 2019
As anyone involved in the real asset market will know, the past two years have seen intense competition for stable income generating infrastructure assets like water companies, airports and toll roads.
Unsurprisingly, this has pushed prices up and returns down. But it’s also had another, less immediately obvious effect - putting asset management capabilities at the heart of the skills needed by today’s real asset investors.
These skills are key to driving additional returns from existing assets and to successfully moving up the risk curve as investors seek to diversify their portfolios. According to our Emerging Trends in Real Estate: Europe 2019 study, 89% of respondents say that achieving the target returns will require more engagement in the operational aspects of real estate.
This is a clear shift away from a market where traditional investors’ have taken an arm’s-length approach to operations, to where they need to fully consider the capacity and capability they need to make the most of the opportunity.
Drivers for the growing focus on asset management:
1) Falling returns - as touched on in our previous blog - the returns on infrastructure assets, still regarded as a “safe haven”, have declined due to increased competition for these assets. Hence the need to get involved in active management of these assets to shore up these returns.
2) Increase in market uncertainty including regulatory changes - current market uncertainty has led to investors taking a deeper dive into their portfolio to assess the exposure they potentially have to movements in macro economic factors or other regulatory changes. To protect returns and valuations, it’s critical that the owners understand these risks and ensure they’re being addressed in their business plans.
3) The move into core-plus assets - by buying into assets that have infrastructure-like characteristics, but carry higher risk, higher returns and higher growth potential – the likes of car parks and fibre networks – investors can offset the fall in returns from their core infrastructure assets, and pep up the overall performance at a portfolio level. However, these assets can be more complex to run, and require more active management from investors.
Asset management gets more active
This means getting closer to the issues around management, operations and other financial aspects – while also seeking to identify and address gaps in these areas to improve the business’s performance and returns.
Yet while investors recognise the need to be more hands-on in operations, they’re still heavily dependent on the incumbent management to come up with initiatives to improve performance and returns. This reflects the fact that, as investors, their core expertise is around deals rather than the day to day operational running of the underlying investments.
As investors wrestle with such issues, we’re seeing them take a number of steps in response. One is to change their acquisition strategies, with many investors focusing on acquiring majority stakes in order to have more control over asset performance. In particular, sovereign wealth funds and pension funds have been active in acquiring controlling positions.
Another shift is that investors are expanding their asset management capabilities to enable a more focused and better-informed effort towards asset management. Funds are handling this expansion in different ways.
Whilst some are sticking with a more traditional approach, where the deals team takes on the ongoing management of the asset it helped to acquire, hiring in sector experts on a retainer basis as needed, others are setting up a separate asset management team – generally staffed with sector experts – that takes ownership of the asset after completion of the deal, with support from the deals team when required.
The industry’s more sophisticated players are going further, incorporating technology into their wider portfolio management, performance analysis and reporting activities and processes. It also involves looking at value-adding operational initiatives.
The opportunity on offer
We expect this recent shift in active asset management to intensify over the next few years. Asset managers will need to have a clear agenda and ensure that they are resourced appropriately. It will also become important to leverage the learning from each asset and apply it to other assets in the portfolio to drive value across the entire real asset portfolio.