Private infrastructure valuations

Welcome to Pathways, a Macquarie Asset Management podcast where we provide fresh perspectives and insights for institutional investors and consultants about real assets, private markets, and macroeconomics.

Daniel McCormack

Private infrastructure multiples are currently below US listed equities. And this is, from a historical perspective, highly unusual.

Hi everybody, my name's Daniel McCormack, I'm head of research at Macquarie Asset Management.

Back in 2023, when we first published our proprietary data set on private infrastructure, EV to EBITDA multiples, what most investors were focused on is, interest rates were rising, will private infrastructure valuations fall?

Since then, the market narrative has shifted, and today most investors are asking, public market valuations are elevated, particularly in the technology space. Are private infrastructure valuation multiples also high, perhaps driven by the really strong pricing that we're seeing in the digital infrastructure space?

So, to help me unpack all of this, I'm joined by my colleague Aizhan Meldebek, who's MAM's global infrastructure strategist. She's recently updated her 2023 paper on private infrastructure valuation. So, this is a great time to be having this conversation.

Aizhan, welcome back to the Pathways podcast.

Aizhan Meldebek

Thank you, Dan. Great to be here.

Daniel McCormack

So, Aizhan, let's perhaps just start with, you know, right out of the gate: in updating your paper and updating the data set, what were the 2 or 3 things that most surprised you?

Aizhan Meldebek

Yes, so, I think the three things that really stood out when we ran the numbers is that firstly, private infrastructure today is cheaper than it has been in the past, so based on EV/EBIDTA multiples, uh, so it's below the historical peak that we've seen in 2022 and that's very unusual because unlike public markets which are seeing high valuations, private infrastructure, valuations have actually, uh, normalized.

And then, secondly, our analysis shows that, inflation is not only a driver of the revenue growth, uh, but it's also, uh, driving and impacting valuations, and that, that's quite interesting.

And thirdly, contrary to common belief, uh, that, dry powder, uh, can push up, uh, valuation multiples in private infrastructure, uh, actually, um, our, uh, data shows that it does not have that much, uh, impact, overall.

Daniel McCormack

That's really interesting. So, perhaps let's double click on each of those, and let's start with the first, where you talk about the level of private infrastructure multiples being relatively attractive compared to, to listed equities, if I understand you correctly.

Could, could you just walk the audience through, like, where are private infrastructure multiples right now compared to their own history, and, and what are some of the drivers of that?

Aizhan Meldebek

Yes, of course, and I think I would just note that many investors have a perception and probably based on the lots of news headlines on data centers that private infrastructure is really expensive. But I think that's based on the fact that the data centers that's mostly covered, I think, uh, in the news, the trade at 25 to 30 times EV/EBIDTA and people Uh, may wonder if it's applicable across the whole asset class, but the key point is that the data centers are important, but they are not the whole story.

So private infrastructure is just much broader.

So if data centers account for about 10% of the global deal activity and 20% in the US because it's the largest market for the sector, the broader infrastructure is a lot about utilities, energy midstream, uh, renewables, transport, waste, and hospitals, and all of these sit within the infrastructure universe.

So, when we look across sectors on a weighted average basis, multiples today are at around 14 to 15 times EV/EBIDTA uh, and that's only slightly above the long-term average of 13.5 times.

So, um, what, what it shows is that the valuation multiples have largely normalized over the past 2 to 3 years, um, and so move back to, towards the long-term average.

Daniel McCormack

Got it. And if private infrastructure multiples are roughly in line with their long run average, I know listed markets are quite expensive, so you know, on a straight up multiples basis, is private infrastructure, you know, it's cheaper than listed markets, is it? Is that the right conclusion here?

Aizhan Meldebek

Yes, that, that's right. And I think that is uh where the picture gets really interesting is, is on a relative basis. So, when we look over the whole history of the data that we have, so over the past 17 years, private infrastructures almost always traded at a premium to listed equities. So, on average, it was about 2.2 times the positive spread between the private infrastructure and broader equity markets.

But today, relation, this relationship has flipped. And in other words, on EV/EBIDTA basis, private infrastructure is currently trading at a discount to listed equities. And historically, we've only seen this happen twice, so briefly after the global financial crisis and again during the strong market rally following COVID-19.

For investors from a total portfolio and asset allocation perspective, it can be a really interesting story for private infrastructure because it signals a more attractive entry point into the asset class.

Daniel McCormack

Yeah, I think that's really interesting, because I think it's not just listed equities that are expensive at the moment, right?

If you look at listed credit, for example, the spreads there are by historical standards, very, very low, and so, you know, are they accurately pricing, the, the risk that is out there?

But certainly, I think credit looks, looks expensive as well, and, you know, in that context, if infrastructure's, you know, multiples are in line with its long run average, looks like good relative value compared to, you know, a lot of sort of asset classes out there, or, or a huge swathe of, of market cap that's available to investors. Really interesting.

Aizhan, let's go to the second point, which is around inflation. So, you said at the start that inflation impacts the multiple. Could you just talk through in what direction does it impact the multiple, I guess that's, that's the first question. And, and secondly, why, why, what's, what's the driver there?

Aizhan Meldebek

Yes, sure. So, when we did our analysis, we took all the relevant macroeconomic variables, so inflation, interest rates, GDP growth, and we run our uh multivariate regression to understand which ones really matter for the overall asset class.

And there were two macro variables that mattered most for private infrastructure multiples: it's interest rates and inflation.

I think it's quite straightforward with the interest rates. The, the relationship is negative and you would expect that across most of equity asset classes because high interest rates, they push up the discount rate and financing cost and which typically then puts a downward pressure, uh, on multiples.

Inflation, on the other hand, is, is different, right? So, it's quite unique for infrastructure as an asset class. It is a positive driver for, uh, the multiples because many assets, uh, have explicit inflation linkage in their revenues.

So, for example, uh, in regulated the utilities, allowed, revenue, uh, uh, allowed returns [are] often set under, regulated asset-based framework and regulators periodically review the assumptions, like inflation and interest rates, and high inflation generally translates into higher allowed revenues over time.

In other sectors, for example, in toll roads, revenues are often linked to CPI through inflation indexation, and then you also have CPI escalators in digital infrastructure, for example.

So, I think overall for private infrastructure, inflation linkage, um, is, is quite explicit. And, in practice, uh, what happens is that higher interest rates, they put pressure on the multiples while high inflation can support multiples, and that, these are the two main dynamics that we are seeing that matter for entry multiples.

Daniel McCormack

Just, just to make that crystal clear, Aizhan, you talked about that there's a link between inflation and the revenue line for, for infrastructure assets, but in terms of the multiple, how, how does it translate into a positive relationship with, with the multiple?

Aizhan Meldebek

Yes, exactly. So, inflation, first, of course, shows up in the, in the revenue growth. But, uh, because valuations are not based on, uh, just the revenues and not the, the revenues today, they rely on the expected future earnings growth so generally, what happens, and we've seen it, uh, in 2022, right, a higher expected inflation was lifting the expected cash flows as well. So, when investors have more confidence that those future cash flows will rise with inflation, they may be willing, uh, also to pay a higher, higher multiple. And, and this is what the data shows. Um, in other words, in a higher inflationary environment, investors value assets with inflation linkage more.

Daniel McCormack

Yeah, I see. They start to, to think that, you know, revenue growth, earnings growth into the medium term will be higher, and, you know, therefore, you should be paying a higher multiple for that extra growth. I see. Got it.

OK, really interesting, and I think, you know, you alluded to it there in your answer, but there's probably an aspect of, when inflation is around, like, investors are seeking an inflation hedge, right, infrastructure offers that, and they move into the asset class for that benefit, and arguably at the margin, that puts upward pressure on multiples as well, and perhaps contributes to that positive statistical relationship that you've found. Really, really interesting, um, that there is a positive relationship there. Great.

So let's, let's now just turn to the final one, which is dry powder. For the, uh, for the uninitiated out there, you know, dry powder is the amount of capital that has been raised in funds but has not yet been deployed.

And I, and I think, you know, from my discussions with investors over the years, Aizhan, I know this is a huge issue, as in investors see these large amounts of capital that have been raised but have not yet been deployed into assets. And they think that asset managers, just given their business model, are going to be anxious to deploy that, and that may result in them, you know, putting upward pressure on valuations and, and multiples, and, and potentially even overpaying for assets.

This is a really common pushback I've heard from institutional investors. But, as I understand from what you said, you find that there's, there's no relationship between dry powder and valuation multiples. Can, can you explain that?

Aizhan Meldebek

I, I, I think it's a, it's a very fair question because intuitively, you would think that if more capital is chasing a finite number of assets, you would expect, uh, multiples to rise. But what happened is that when we tested in the data, we don't find a statistically significant relationship. And that's probably because it's true that dry powder has been rising, but it has been rising alongside, uh, deal activity.

So, over the past 15 years, dry powder has been growing at an average of 10.2% per year while the deal volume has been growing at about 11% per year. So essentially the capital supply and the asset supply have been expanding at a very similar pace.

As a result, when we look at the ratio of dry powder per deal activity, it has been largely fluctuating, but we haven't seen an upward trajectory that would be, uh, worrying. Uh, so, essentially, dry powder does not, uh, show up as the primary driver of the valuation multiples in our analysis. It, of course, doesn't mean that some assets, maybe some trophy assets that many investors would like to have in their portfolios, uh, they are not impacted, but overall, for the whole asset class, we haven't seen it as a, as a primary driver.

Daniel McCormack

That's really interesting, and I think it's, it's a really counter-consensus conclusion that, um, I mean, it, it, you know, it, it makes eminent sense, right? Like, the expansion in the deal volume means that the actual amount of dry powder is not that large, it's not as large as it looks if you just draw a chart of dry powder in nominal terms, but, yeah, certainly would, would push back against what is a pretty strong consensus on that issue.

OK, so let's maybe just get technical for one question, Aizhan, and, and that is how you did this work? How, how did you create this database, this time series of transaction multiples, because for infrastructure investors, the paucity of data is a real issue. You know, if, if you're investing in listed equities, say, there's just a huge amount of data, you're just swimming in data that you can analyze, unpack, to try to understand the asset class.

In infrastructure, that's not the case. I mean, there's, there are some return benchmarks out there. But that's kind of about it, so I know that your creation of this valuations time series has, you know, really expanded the data toolkit available to infrastructure investors, and I know they've really appreciated that.

So, could you just talk the audience through exactly like, what you've done here and how you've done it?

Aizhan Meldebek

So, the, the main motivation for us to uh run this analysis was to answer the key questions from investors, um, such as, where are we in the valuation cycle? Why did valuation multiples fall so sharply during the, uh, global financial crisis, and, how do private infrastructure evaluations compare to listed equity markets?

So, you, you, you are right that private markets by nature, I think are far uh less transparent than public markets and because transactions are confidential and there's no obligation for participants to disclose this information, we just don't have as much, uh, consistent data that exists, uh, for listed equities.

But given Macquarie's history in infrastructure and the access to data, we, we figured that we, we have this ability to do something differentiated and to answer more questions for investors.

So, we, what we did is that we went across all of our investment teams and we collected individual transaction multiples, going, uh, all the way back to 2008. And we worked with different regional and sectoral teams to gather this, uh, market intelligence, not only, uh, for deals where Macquarie has participated to, but market intelligence across the whole market.

So, what we managed to collect now includes more than, uh, 1300 EV/EBITDA multiples from real transactions that took place in the market. Uh, and we have anonymized this and analysed it, which has produced very interesting insights. The primary objective is just to make private infrastructure more transparent asset class for investors.

Daniel McCormack

Thanks, Aizhan. I know this type of work is very labour-intensive. It's, it's very granular, but pulling this time series together, you know, really valuable to the, to the investor universe out there, so, so well done again.

Can we turn to sectors, please, because we, we talked in the opening about digital infrastructure in particular. It's certainly very topical at the moment. Data centres are, are being talked about by pretty much everybody, it, it seems, and in some pockets, multiples are quite elevated there.

But could, could you just walk us through, you know, at the sector level, what are you seeing in terms of valuation multiples?

Aizhan Meldebek

Yes, so we, we'll start with, with digital infrastructure, given that it's probably the most discussed sector at the moment. So, when we look at large data set centre platforms, the multiples remain elevated, so it's 25 times and above.

When we look at the earlier stage, more development-heavy opportunities, they typically price lower because, uh, investors need to, uh, price in the build risk and, uh, lease-up risk and just longer path to cash flows. But that's the data centre story.

Uh, there is, however, a very different dynamic when we look at the fibre networks because, They, they are facing currently more headwinds from more intense competition. Also, we've seen more overbuild historically, so this is all, I think, started to put a downward pressure on valuation multiples. In the UK we've seen, for example, an altnet enter administration and, alongside, the instances of lenders taking some losses. So, the opportunity here is actually to acquire, uh, these fibre network assets at more attractive prices, but investors, I think, uh, need to be more, more selective.

Daniel McCormack

And, and what about some of the other sectors, Aizhan, such as transport, utilities, how are valuations there?

Aizhan Meldebek

Yeah, so, when, ah, we look at transport, we've actually seen a very strong recovery, particularly led, led by airports, as passenger volumes have now fully recovered, and deal activity has returned. So, what we've seen is that during COVID and in the immediate aftermath, so airport transactions were very limited on the market, but as the traffic recovers and investor confidence has improved, the, the pricing has followed. So, airports uh currently trade uh at a higher multiple.

And also generally, I think for transport, transport multiples were lower during the 2021 to 2024 period, reflecting higher financing costs, some uncertainty about the traffic and any potential structural changes post-COVID, but across most of the transportation sec sectors, we, we've seen a strong recovery.

When we look at the energy and utilities, there are also different dynamics, so, uh, let me just provide uh more detail here. So, valuations for regulated networks have, have also increased on a EV-to-regulated asset base, supported by a stronger outlook for power demand. That's the case for, I think, both the uh, electric and gas utilities, driven stronger power demand, accelerated by the data centre growth.

Uh, where we've seen lower valuation multiples is for thermal generation. When it comes to energy midstreams, uh, multiples have, uh, rebounded, particularly for storage assets, reflecting new strategic value in energy security. In Europe, dependence on imported energy, continues to support investment, across the value chain.

The, the, the bright spot that uh we are seeing is uh renewables because multiples for renewable, uh, renewables declined between 2021 and 2024, driven by um several headwinds including the supply chain, cost pressures, the higher cost of capital. But in 2025, we've seen that multiples have rebounded, although they still remain below the, ah, prior peak levels, but overall I think the sentiment has improved and the recovery has, was supported by a stronger power demand expectations.

We've also seen that supply chain inflation has eased and the cost of capital has stabilised, which will help to improve, I think, the outlook for, for renewables overall.

Daniel McCormack

I, I think it's really interesting that you can, you can get a picture of sector multiples through all of this. I, I guess when you go down to the sector level, like your sample size is going down, right, so to a degree, would it be fair to say that, you know, the data that you have there is, somewhat like less reliable just because of the, of the smaller sample size?

Aizhan Meldebek

I think that's right. So, the more um detailed we, we get, so the, at the sub-sector level, it's, it starts to become more difficult to interpret the data because we get smaller sample sizes, uh, which, which makes it less reliable for interpretation.

Daniel McCormack

But certainly, I've noticed, if you look at the graph, like at the, at the higher sector aggregation, the multiples do seem to track what you would expect for the sector, right? So it does, it does seem to be, to be reasonably accurate, but certainly take your point, if you get right down to some of the smaller sectors, the sub-sectors and the like, you know, the sample size there, may mean that you just need to take, take the data with, with, with a little bit of a grain of salt, but it's, you know, it's informative nonetheless, right?

So, the last topic I'd like to tackle is the outlook for multiples. Because I would imagine, given this work – where you've looked at the relationship between interest rates and the multiple, the relationship between inflation and the multiple, dry powder and the multiple – you know, if I was to give you a certain macroeconomic scenario, right, or put differently, if you had some assumptions for macroeconomic variables, you could kind of feed them into these regressions, into this little model, and that would spit out a path ahead for valuation multiples for the, for infrastructure. Is that right? Can you do that?

Aizhan Meldebek

Yes, exactly. So, based on this analysis and because we, we have the historical data we can project based on various macroeconomic scenarios. And as we discussed earlier, the inflation and interest rates are the main ones that matter for asset class level, uh, multiples.

And I think it would be very interesting to hear your perspective, given that what's happening in the world, in terms of geopolitics, what is the direction of travel for both these indicators? Where do you see inflation and interest rates going, going forward?

Daniel McCormack

Yeah, sure, I think, I think coming into this year, like the outlook was, you know, was reasonably straightforward, I think. The global economy and, and the developed world were probably growing around about trend, maybe a touch above, but, you know, around about trend. Inflation was clearly a little bit above target. In the Eurozone, it was in line with target, but in the US, in the UK, in places like Australia, which is a, which is a big infrastructure market, inflation was clearly above central bank targets and above long run average levels.

And then broadly speaking, I think the outlook for interest rates was, was, was pretty steady. Markets were expecting the ECB to be on hold all year. I think they were expecting maybe two cuts from the Fed, maybe two cuts from the BOE, sort of on hold from the Reserve Bank of Australia. So, so that's on hold-to-a slight downward tilt in interest rates, but of course, in the intervening period we've had the, the, the crisis in the Middle East, and that's changed things a little bit.

So, I think that will put a little bit of downward pressure on growth, so, we might be going from, you know, sort of slightly above-trend/trend growth to trend/slightly-below-trend growth. But nonetheless, just shave a little bit off growth momentum.

It obviously puts upward pressure on inflation, particularly headline inflation, so that's now going to be more elevated than we previously thought, and we previously thought it was going to be a little bit elevated already.

And then, it's really changed the picture for interest rates, I think. So, in some cases, like the Fed, for example, markets have gone from expecting two interest rate cuts to expecting the Fed to be on hold all year. in other places like Europe and, and Australia, you know, the market's gone from expecting the central bank to be on hold all year to actually, you know, tightening once, twice, or even thrice. So, we have seen interest rate expectations shift up a bit.

So, overall, Aizhan, I think it's a, it's a picture of, below, below-trend growth for the developed world; inflation, clearly above central bank targets. And, and interest rates, steady to, to slightly higher over the rest of this year.

So, let's just assume for a second that that's, that's broadly accurate. What would that mean for infrastructure valuation multiples?

Aizhan Meldebek

So, high inflation would be a tailwind for infrastructure multiples while an increase in interest rates would be a headwind. So, it largely depends how central banks react to higher inflation.

So, in a scenario where central banks largely look through the temporary spike in inflation, uh, we, we may see policy ra-, rates, staying broadly stable or see some increase. And, in this case, I think, private infrastructure valuation multiples may, uh, slightly increase over the coming quarters.

If, however, we saw, tighter response in, uh, monetary policy, which leads to weak, even weaker, uh, growth for the global economy and more of a stagflationary picture, we, we, we may see valuation multiples declining to some extent.

But I think overall, in relative terms, infrastructure is better positioned and I would expect it to be more resilient than many other equity asset classes just because of the linkage with inflation and that we may be uh just in a higher inflationary regime.

Daniel McCormack

I, I don't want to put words in your mouth, but it, it, it sounds to me like you think the tailwind from inflation is stronger than the headwind from interest rates. Would that be your best guesses?

Aizhan Meldebek

Well, actually, if we look at the data only, so 1% increase in interest rates have a larger negative effect on the multiples, uh, than 1% increase in inflation, uh, that has a positive effect. So, actually, interest rates have a stronger impact on valuation multiples. But because, valuation multiples is only part of the picture. It only accounts for the multiple expansion itself, over the past decade only accounted for about 20% of the total return that private infrastructure has delivered.

The main, outlook for returns comes from the earnings expectations for infrastructure, and the earnings growth for infrastructure has a very strong linkage to inflation.

So, overall, for total return picture, inflation is the bigger driver, but when we talk just about valuations, interest rates, uh, is a stronger driver.

Daniel McCormack

Yeah, sure. I mean I guess it depends on how much interest rates move up and how much inflation moves up. As in, inflation could move up quite a bit, but maybe rates don't move up that much. Anyway, we'll have to see how the macro environment evolves, but, you know, that's a really great way, I think, for investors to think about the the outlook for the multiple is, is your work here because it provides a framework and a, and a model for doing that.

So, that's fantastic, and I, and I know periodically you update this, and, and you sort of update the outlook, or your, your best guess as to the outlook for multiples based on, based on how the macroeconomic environment is evolving.

Look, one, one thing that we, we, we, we've talked about briefly, but, but not unpacked fully is, the impact of growth on the multiples, right? We, we've just talked about inflation and interest rates, but I sort of suggested to you that maybe, growth expectations will drop a little bit now courtesy of what's happened in the Middle East. Does GDP growth matter for, for the multiples?

Aizhan Meldebek

In short, it does matter for some sectors, so if we take a transport, it does, but overall, for the asset class, it does not matter.

So, if we take, for example, period during COVID, what we've seen is that the transport valuations have been impacted whereas the digital infrastructure valuations have actually increased.

For diversified infrastructure portfolio, overall, the impact of GDP growth, it has not been very visible in terms of valuation multiples.

Daniel McCormack

And it, and it makes sense that it has an impact on transport, right, because a lot of transport assets, you know, the volume numbers there do have a good correlation with GDP.

So, you know, I think that, that makes a lot of sense. But it's also pretty interesting that at the asset class level, there really isn't a significant relationship to speak of.

Now, of course, GDP will matter for earnings, for, for a lot of, um, infrastructure, but doesn't have a relationship with, with the multiple, so it's all about inflation and interest rates and, you know, which one of those is stronger, is having a bigger impact.

Aizhan Meldebek

Yes, and I think that's a courtesy of infrastructure being differentiated and diversified in terms of the structural drivers and the themes that are driving various infrastructure sectors.

Daniel McCormack

Thank you very much, Aizhan. That, that's a wrap.

What I've heard from Aizhan today is that inflation has a positive relationship with infrastructure multiples. Interest rates naturally have a negative relationship. GDP growth doesn't have any relationship with the multiple, and really interestingly, dry powder doesn't have a relationship with, with the multiples either, which is, you know, which is a really counter-consensus finding in this, in this paper.

Really interesting also that infrastructure multiples are basically back now in line with their long run average, while for many other asset classes, valuations are quite elevated. And that really speaks to, I think, a, a good relative value story here, in addition to the fact that infrastructure could be pretty well suited to the current environment, given its defensive equity with an inflation hedge.

Thanks very much, Aizhan for joining the podcast today. So, some fantastic insights. We'd love to have you back on when you next update this piece of work.

Aizhan Meldebek

Thank you, Dan.

Daniel McCormack

To our listeners, thanks very much for joining. You can download Aizhan's paper on the Macquarie Asset Management website, and there's a link in the show notes below, and I'd, I'd encourage you to do so if you would like more detail.

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