A little over a year after Barings launched its partnership with the Maryland State Retirement and Pension System to target smaller direct infrastructure deals in the state, Barings’ head of infrastructure secondaries and solutions, Mina Pacheco Nazemi, is "seeing more of an opportunity set for infrastructure." 

"We're seeing private equity returns within infrastructure,” Pacheco Nazemi told Institutional Investor.

Over the past several years, Barings has shifted toward value-add infrastructure while trimming its allocation to private equity. Pacheco Nazemi has seen the asset class generate private equity returns with greater downside protection. The strategy has also proven resilient through the recent inflation surge: its revenues are largely contracted and inflation-linked, anchored by physical assets carrying substantial replacement cost. 

Against this backdrop, allocators are consistently increasing both their exposure and target allocations to the asset class. New research from Marsh (formerly Mercer) shows that most asset owners (50.7 percent) plan to increase allocations to infrastructure this year. Garvan McCarthy, chief investment officer of alternatives at Marsh, attributed infrastructure’s net win in part to “positive forces that are supporting deployment.”

“Infrastructure is almost uniquely placed to balance the defensive characteristics of regular cash flows, inflation sensitivity, but also benefit from some of the capital gains that will come through economic growth in certain parts of the cycle,” McCarthy added. 

A Difficult Time for Private Equity 

It’s been a difficult couple of years for private equity. Deal volume and count have been down, while assets have been trading at historically low levels. Allocators are expressing frustration to their managers over the lack of Distributions-to-paid-in capital, or DPI, which essentially measures how much cash investors regularly get back from private equity firms. Rising rates present another problem as more portfolios have ‘stale’ or potentially even ‘fake NAV,’ where assets are overpriced because their net values are based on multiples from several years ago. 

“I think private equity is really, really stuck and is going to be stuck for a while, unfortunately,” Pacheco Nazemi added. 

Meanwhile, infrastructure transactions are multiples higher, both in deal count and size. Tina Byles Williams, founder, CEO and CIO of Xponance, told II that two things are boosting infrastructure: The first is geopolitics. In the uncertain environment of the last six years, energy shocks have created a series of demand surges and supply shortages. As a result, companies and governments have shifted their priorities from efficiency to resiliency and workarounds, all of which leads to infrastructure builds. These factors also favor public markets, including industrials, commodities, energy, shipping, defense, and security. 

“Everyone is rearming because these post Second World War alliances are obviously getting a little frayed,” Byles Williams said.

The other factor driving up infrastructure investment is the building of AI data centers. According to industry estimates, compute spend still dominates capex. “And unless there’s some other way of generating compute, there’s a six-year decaying GPU efficacy,” the Xponance founder added. “So, that is a built-in spend.”

Baring’s Pacheco Nazemi said she finds continuation vehicles compelling in infrastructure, especially for smaller managers with comparatively little capital. Smaller, ambitious managers are often compelled to sell their best assets to a larger competitor that reaps the rewards of the groundwork the smaller manager has laid, which she finds unfortunate. 

"It pains me to see these super hungry smaller managers sell their trophy assets to a larger competitor that rests on the laurels of all the work that the smaller manager did,” Pacheco Nazemi said. “That's why I like the CVs."

She explained that a CV allows these managers to raise incremental, expansion-focused capital to scale the asset further, while delivering DPI to the investors seeking it. “Two or three years ago infrastructure CVs were a novelty,” the Barings executive added. “We'd expect more lower middle market infrastructure activity over the next 12 to 24 months across digital, energy and power, transportation and the circular economy.”