Listed vs unlisted: what’s the difference?
The lockdowns experienced by most economies around the world have highlighted the fact that basic infrastructure – including electricity and gas, running water and sewage, and even the almost total reliance on communications services – is essential to our societies.
For investors, the current crisis has opened up an enormous opportunity, with infrastructure investment having an important role to play in the global recovery.
There are a number of benefits for investors in infrastructure as an asset class including its potential lower volatility, higher earnings stability through long-term steady cashflows and dividends, inflation protection and portfolio diversification characteristics relative to broader equities.
Investors usually access such assets in two ways; either by investing in securities listed on global exchanges, or by investing directly in the assets themselves and/or through pooled investment vehicles.
It’s common to hear the question ‘why listed?’ when it comes to investing in infrastructure. While some argue in favour of one approach over the other, we believe infrastructure is a homogenous asset class, and as such, the optimal allocation between listed and unlisted infrastructure is driven by individual investor circumstances.
For a rational investor, we believe listed should be considered equally and alongside unlisted when considering an allocation to infrastructure. Inherent in this decision are a number of factors including fees, liquidity and portfolio rebalancing requirements, risk exposures, diversification, cashflows, opportunity sets and perhaps most importantly, risk-adjusted valuations, as opposed to splitting the asset class by method of accessing equity.
Some of the common arguments used for investing either through listed or unlisted approaches include:
Assets owned by listed and unlisted infrastructure are different
Despite the common assumption that listed and unlisted infrastructure are distinct asset classes, we see the physical characteristics of assets owned by listed and unlisted investors as similar, if not the same.
1) Similar assets can be accessed via both listed or unlisted markets
For example, access to an airport asset owned in an infrastructure fund of unlisted assets can be very similar to, if not the same as, access to an airport asset owned in the listed market.
Melbourne Airport is owned by unlisted investors, while Sydney Airport is owned by listed investors. Other key listed airports include Frankfurt Airport, Paris Airports and Tokyo Haneda Airport, while unlisted airports include Brussels Airport and Bristol Airport. On a passenger traffic basis, eight of the world’s top 20 airports and 15 of the top 50 airports are owned, partly-owned, or operated by listed airport companies and groups.
The same applies to other sectors such as tollroads and water utilities.
2) Some assets have equity stakes in both listed and unlisted markets
Investors can access different infrastructure opportunities – such as Vienna Airport, Heathrow Airport, M1 Eastern Distributor, Ontario’s 407 Express Toll Route, Queensland
Motorways in Australia, APRR (France) and Aleatica (Mexico) – through both listed and unlisted routes.
Given the inherent similarities in the types and physical characteristics of both listed and unlisted infrastructure assets, it is difficult to differentiate infrastructure on the basis of ownership. As such, the immaterial difference between the physical nature and characteristics of the assets owned by listed and unlisted investors suggests they are largely homogenous, as opposed to distinctly different by nature.
Regulators treat listed and unlisted infrastructure businesses differently
The regulators of infrastructure businesses are the same, regardless of who owns them. As monopoly providers of essential services, infrastructure businesses are regulated to guarantee certain outcomes, such as the provision of fair and transparent pricing, and adherence to rules around service quality, capital expenditure, maintenance and upkeep.
As regulated infrastructure businesses are subject to long-term rules governing their rate of return on equity (ROE), it is only prudent that a core component of a listed infrastructure investor’s research involves analysing regulatory documents and speaking with regulators around the world. One common observation is that there is only one regulator for monopoly assets within a specific sector and jurisdiction, meaning that listed and unlisted investors do not have an advantage over one other from a regulatory perspective.
Regulators rarely pay attention to the ownership of the asset, except for some focus on capital structures which have some bearing on returns.
Investing in unlisted infrastructure is like buying private equity
Some argue that unlisted infrastructure investors have better control as they have direct ownership and management of assets, inferring it is akin to buying private equity.
However, it must be highlighted that it is difficult for unlisted infrastructure to outperform on purchase price or general market moves alone. Unlisted valuations generally trade at substantial premiums to the listed market and unlisted buyers must assume this premium when they compete for new assets.
It is certainly true private equity has greater active ownership of assets compared to public equity investing, for example, by exerting greater influence through board seats, incentives, alignment of management, and control over costs and of cashflow.
A number of other common arguments in favour of unlisted investments include less focus on short-term earnings, less time spent by management on investor relations and roadshows, and quicker decisions by a smaller number of owners. However, the impact of private equity on returns has proven less prominent. In addition, the historical returns need to be seen in the context of higher fees and greater risk due to typically higher debt levels.
Some assets are only available to listed infrastructure investors
There is some truth to this observation. Generally speaking, the types of infrastructure assets owned by listed and unlisted investors varies between sectors, with some either under-owned or not owned at all by unlisted investors.
For example, many large regulated utilities (such as large city gas or electricity distribution networks, or large, long-distance pipeline infrastructure) are more difficult to access for an unlisted investor. This is not to say it is impossible, but there is only a finite amount of capital that unlisted investors – whether individually or by consortium – can and will commit to single infrastructure investments, and so ownership of these larger assets becomes more difficult.
In addition, we believe there is a quality bias in favour of the listed market as the largest assets, more often than not, need to be listed. Looking around the world, we find some of the largest airports, distribution and transmission networks, pipeline networks and water utilities are typically owned in listed markets.
Unlisted infrastructure performs better than listed
It is sometimes argued that unlisted infrastructure has outperformed listed infrastructure and is less volatile. However, there are several information and valuation asymmetries that make comparing the returns and volatility of listed and unlisted infrastructure problematic.
Listed infrastructure is priced and valued daily, and is therefore influenced by market sentiment. Unlisted infrastructure values meanwhile are based on periodic valuations of underlying assets, which typically occur on a quarterly, semi-annual or annual basis.
Unlisted infrastructure volatility calculations are based on valuation movements, which are typically a manager’s or independent third-party auditor’s best estimate of the expected future cashflows to investors of an infrastructure asset discounted to their present value.
To put this into the listed perspective, this is analogous to an investment manager taking their valuation model for a listed company and calculating the volatility from quarterly or annual movements in their internal valuations, irrespective of share price performance. Accordingly, these valuations are not equivalent to a market price, even on a quarterly basis, as they lag the market and are inherently smoothed.
Our research suggests these differences in performance do not persist over the medium to long term, and rather, the underlying performance of listed versus unlisted infrastructure is highly comparable.
Against this backdrop, we can see how listed and unlisted infrastructure are complementary. Over the past decade, unlisted infrastructure has outperformed listed infrastructure, but listed (when valued quarterly, like unlisted) has actually exhibited slightly lower volatility. Past performance is not an indicator of future performance, and so, without a crystal ball, there is a strong argument for blending allocations between listed and unlisted, given they own the same types of assets.
For investors, the allocation to infrastructure as an asset class is the first question. Further questions should revolve around desires such as increasing a balanced portfolio’s inflation protection, reducing its volatility and increasing its diversification. Additionally we know investors like the potential for strong and consistent cashflow of unlisted infrastructure and so suggest they should look to at the high dividend yield of strong listed infrastructure companies too.
Only once an investor has decided to allocate to infrastructure should they consider how they wish to direct capital to listed and unlisted exposures. They will need to have a view on a number of factors including the opportunity set, diversification requirements, fees, liquidity and portfolio rebalancing requirements, and risk-adjusted valuations. Indeed, blending listed and unlisted infrastructure investments has shown to actually reduce asset portfolio volatility.
Advisers are well-placed to help clients with these considerations and identify the best approach for them to gain exposure to infrastructure investments and the potential offered as the world recovers from the COVID-19 pandemic.
Steven Kempler is a portfolio manager at Maple-Brown Abbott.
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