Another reason to like infrastructure investments

I normally don’t write about thought pieces from asset managers because most of them are not necessarily objective, but rather talk the asset manager’s book (I know because I used to write some of theses though pieces). However, I came across an interesting result from PGIM’s Xiang Xu, who developed a simple methodology to unsmooth the returns of private assets and compare them fairly with publicly listed assets.

In essence, what he does is pick a bunch of funds in private assets like infrastructure, buyout, or mezzanine capital at random, then simulate the cumulative investment return over the long run and back out the average return and volatility from the resulting distribution of outcomes.

By doing that, he can compare the reported returns of private assets with the real-world return investors experience and the returns of publicly listed assets. Here are his results for the reported and real-world returns and risks from 2005 to 2023.

Reported vs. real-world performance of private and public assets

Source: PGIM

Of course, the true volatility of private assets is much higher than the reported volatility because private assets don’t get valued daily like public assets. On top of that, investors cannot replicate the entire universe of public assets in their portfolio like they can with an index tracker on stocks or bonds. Thus, depending on which funds an investor picks, the risk and return experience can be very different from the average reported in databases.

Additional effects like the fact that not all the committed money to private assets is always fully invested etc. mean that real-world returns for private assets also tend to be significantly lower than the reported returns. Except, it seems, in infrastructure. Note that private infrastructure investments show the same real-world returns as the reported returns.

This chimes with my experience from listed closed-end funds in the London market where there is an entire universe of infrastructure funds that invest directly in these private assets but then trade on the stock exchange. My experience with them is that their NAV returns are very good on average and much closer to the actual performance of the underlying assets than in the case of other private assets. I, for one, remain a fan of infrastructure investments.