As discussed in a recent article published in Real Assets Adviser, high net worth and family office investors are increasing portfolio allocations to cash flow investments. These cohorts join institutional investors in this shift, which benefits infrastructure and real estate asset classes.
We have written frequently about the market drivers increasing the appeal of cash flow in a well-diversified portfolio. The most cogent driver is reduced expectations of market returns. The article points to a survey published in Pensions & Investments that indicates U.S. pension funds have reduced return expectations from 8.00 percent to 7.25 percent.
Reduced return expectations translate into an increased risk premium for traditional return-seeking investments like equities. In addition, fixed-income markets are suffering from persistently low interest rates. These conditions make cash flow investments more attractive on a relative basis.
Institutions have substantially increased allocations to alternative asset classes in an effort to increase returns and reduce portfolio volatility. Cash flow assets, including real estate and infrastructure are seeing the strongest investment flows. The article cites UBS’ Global Family Office Report 2019 statistic that, “over 40 percent of the average family office portfolio is invested in alternative investments.”
Direct investments in clean energy assets are an excellent fit for these trends. They offer strong cash flow, asset and credit diversification and hard asset security. In addition, clean energy meets non-financial investment objectives shared by many family offices, including environmental benefits, sustainability and job creation.
Typical clean energy projects we evaluate include commercial and industrial (C&I) solar, cogeneration and biomass. Power produced by these projects may be sold to a third-party user under a long term contract or used directly by the project owner, thereby generating cost savings. The C&I market is especially attractive to family office investors due to investment size and higher risk-adjusted returns compared to residential or utility-scale markets.