The 50-Year Infrastructure Runway

The 50-Year Infrastructure Runway

In keeping with the theme of the importance of the Letter to the Shareholders…I’ll be posting some excerpts from the quarterly letters of Brookfield Asset Management (the parent company of the Brookfield family of companies). These letters were written by Bruce Flatt, the CEO of Brookfield Asset Management. Bruce Flatt is not only a first class CEO, he is a business visionary who does not think in terms of months, or even years but in decades…The insights gained by taking the time to read these reports are incomparable to what the individual investor will find in the public media. 

We are in the early stages of the bulk of the infrastructure backbone of the global

economy being transferred into private hands from the public sector. We believe that this will translate into an opportunity of many tens of trillions of dollars over the next 50 years for the private sector. There are a number of reasons for this shift from the public to private sector, but we think there are three main reasons. The first is that governments are highly indebted; despite this, they still need to keep up with both investment of capital into new infrastructure in the developing world, as well as the maintenance of old infrastructure in the developed world. The second is that private enterprise has proven to be far more efficient at building new infrastructure, as well as operating that infrastructure, than the public sector.

The third is that interest rates are very low(ish) by historical standards and are expected to be that way for the foreseeable future. As a result, institutions need something to replace fixed income allocations in their portfolios that has low risk but reasonable returns. Infrastructure is part of the solution.

As a result, we expect that over the next 50 years there will be both a very large supply of capital for projects, and very large demand by governments for infrastructure capital. Our goal is to continue to build our reputation for fair dealing, good stewardship, and astute investing, to the benefit of the governments/ companies we deal with, the communities that these infrastructure assets serve, and those we invest on behalf of.

Our most recent flagship infrastructure fund is $14 billion and is now over 85% invested or committed. As such, we are now raising the successor private fund. On our existing fund, we do not believe we have compromised our returns to put capital to work, and therefore we see no reason that our next fund will not be significantly larger than the last.

We are often asked why we do not have the same issues that some public equity managers have investing funds as they grow larger. The difference is that infrastructure (as well as real estate and private equity) usually becomes more attractive as investments get larger. The competition for larger acquisitions is less and the sophistication required to operate these assets increases because of their complexity, therefore favoring large and experienced managers. Lastly, the larger assets acquired are generally also higher quality – they often have better counterparties, and stronger management teams. As a result we believe that our infrastructure business can scale to many times the size it is today.

Bruce Flatt,

Excerpt from Brookfield Asset Management’s Quarterly Letter,

February 14, 2019