Lower interest rates should be a boon for infrastructure investments, bringing down debt costs for operators and developers while raising cash flows, dividends and potential valuations.
While infrastructure investments currently make up only a small fraction of most advisors’ overall alternatives allocations, the past few years have seen the rise of more evergreen infrastructure funds aimed at the private wealth channel. Advisors who are investing in or considering investing in infrastructure view some of its main attractions as resistance to inflationary pressures and the ability to benefit from growing technologies such as renewable energy.
However, according to London-based research firm Preqin, infrastructure assets tend to carry some of the highest leverage on equity across private markets. Even publicly traded infrastructure companies rely on a lot of debt to finance their developments, noted Rodney Clayton, portfolio manager of global listed infrastructure strategy with financial advisory firm Duff & Phelps. As a result, the combined impacts of higher interest rates and extremely robust fundraising during the few prior years led to 2023 becoming the weakest year for private infrastructure fundraising since 2017, at $92.4 billion, Preqin reported. According to Clayton, lower rates will help cut the cost of existing floating-rate debt infrastructure companies hold, as well as on future borrowing for new development projects. That should shore up cash flows and potential valuations.
Paul Eitelman, chief investment strategist for North America with investment management firm Russell Investments, wrote in an email that the Fed’s recent rate cut, combined with a seemingly resilient economy, helps the outlook for both public and private infrastructure holdings in the medium term.
“Infrastructure offers useful diversification characteristics given the relative stability of its cash flows and as rate-sensitive sectors such as utilities and toll roads likely benefit from a sustained easing cycle,” he noted. “Over the medium term, we see compelling secular growth in listed and unlisted infrastructure spanning renewable power generation, digitalization and social infrastructure.”
Rob Thummel, senior portfolio manager, investment strategist, and managing director at Tortoise Capital Advisors, wrote that the rate cuts should allow publicly traded infrastructure companies to pay higher dividends to their stockholders, making them more attractive to income-oriented investors. At the same time, lower rates should make it easier for private owners of infrastructure companies to sell them to public entities, though he expects publicly traded energy infrastructure firms will continue to exercise discipline with new acquisitions.
More Impacts of the Fed's Rate Cut on Alternatives
- Rate Cuts Will Provide a Tailwind to Private Equity Activity
- Interest Rate Cuts Don't Spell Doom for Private Credit
- Commercial Real Estate is Poised to Benefit from Rate Cuts
- Advisors Focus on Equities, Longer-Term Bonds Amid Fed's Rate Cut
In addition, the Fed’s initial 50 basis point rate cut may not be significant enough to drastically alter the investment landscape for infrastructure.
“Despite the Fed’s recent rate cut, we think we’re likely to be in an elevated interest rate environment for the foreseeable future, which is an environment where private infrastructure tends to thrive given its ability to provide inflation protection,” wrote Luke Taylor, co-president of alternative investment firm Stonepeak, in an email. “Regardless of where rates move in the near or medium term, infrastructure can be a helpful diversification tool for investment portfolios that offers equity-like returns at a similar risk profile to fixed income given the strong pricing power, high barriers to entry, and duration of these assets.”
