The role of tank storage in the supply chain, the product mix that it can accommodate and location can create an attractive business proposition for infrastructure investors by offering long-term, predictable cashflow generation.
In an interview with Tank Storage Magazine, Robert Hardy, of Investment Principal, Infrastructure Investments Group, J.P. Morgan Asset Management, explains how investors are paying closer attention to tank storage assets and why institutional infrastructure investors are getting a slice of the action.
It appears that infrastructure investors are becoming more interested in tank storage assets, why do you think this is?
A number of tank storage assets already have infrastructure owners and, in some cases, these investments were made over 10 years ago. More investors have started paying attention to the asset class and have invested the time in understanding how integration into the supply chain, contract structures, product mix and location can combine to create a business which offers longer-term predictable cashflow generation – one of the key tenets of infrastructure investing.
When you then overlay the aims of the underlying investors (typically pension funds and insurance companies) to find attractive yields and diversification from other asset classes (particularly fixed income and equities) it is clear why there is likely to be an increasing level of interest in the right tank storage assets.
What are the main factors about tank storage that are attractive for investment?
No two assets or businesses are the same, and in the same way investor sophistication has increased to allow differentiation between two toll roads or airports, this is also evolving with regard to tank storage assets. For a ‘core’ infrastructure investor, the focus is on essential service provision, monopolistic characteristics and stable, predictable cashflow generation.
While it is not an issue today, many investors are also attracted to cashflows which have some link to inflation as their underlying liabilities typically increase with inflation. Further, certain investors value the chance to invest in and grow a business beyond the initial acquisition. This long-term strategy can align well with certain tank storage assets where future expansion and growth is required.
What types of investors are interested in tank storage assets?
There are a wide range, from private-equity style investors who are seeking an exit within a 5-10 year timeframe, to truly long-term investors who have no need to exit from their investments.
While the majority of the investments have been through pooled funds, there has been an increasing number of institutional infrastructure investors taking up co-investment alongside their fund managers, or even managing their own direct stakes in storage assets.
Are there any geographical regions that are of particular interest for tank storage investment?
It really depends on the risk and return profile of the investor. Many funds and other investors have a geographic focus on the OECD, EU or another ‘high-wealth country’ categorisation.
There are however many investors looking at where the product flows are, where the refineries or processing/manufacturing needs are, and taking a view which is less driven by geography and more by the fundamentals. It is as a rule of thumb more likely that the investors in emerging/developing markets will have higher return hurdles than those pursuing a similar investment strategy but in higher-wealth/developed markets.
Why is the ‘flight to safety’ concept relevant to tank storage investment?
Investors have been impacted greatly by the low interest rate environment and in seeking return/yield have rebalanced portfolios to equities and other alternatives investments. However, this can increase volatility to their portfolios. Part of the investment thesis for infrastructure is it can be a diversifier from other assets and can bring yield and stability to a portfolio.
This ‘flight to safety’ has seen increasing allocations and capital flows to all sub-sectors of infrastructure, including liquid bulk storage assets which demonstrate the characteristics of other infrastructure investments.
Hardy will be speaking on the first day of the Tank Storage Germany conference on November 16 at the Hamburg Messe about the financial investor’s perspective on tank storage. For more information, visit www.tankstoragegermany.com.