Real Assets
One Sign Showing the Value in Real Asset Stocks
Article
Aug 17, 2021
One sign of the significant value to be found today in real asset equities: recent record levels of mergers and acquisition (M&A) activity. Large institutional investors and private equity firms are acquiring, or attempting to acquire, listed real estate and infrastructure companies and assets, often at significant premiums to stock prices and earnings. The private capital deals and bids have been particularly active in sectors that have been hit hard by the pandemic and related economic shutdowns.
Real estate investment trust (REIT) M&A activity has totaled $79 billion so far this year, putting 2021 on track to surpass the record $103 billion from 2006, as the chart below shows. The M&A activity has included significant take-private transactions of listed real estate companies, as well as private equity asset purchases from listed REITs. And we are seeing a similar trend in the listed infrastructure space, where M&A activity is also dominating headlines.
A number of factors are fueling the take-private transactions and bids, including cheap borrowing costs, private equity firms’ record levels of dry powder, and valuation disparities between public and private markets, especially in sectors that have faced challenges amid COVID-19, such as airports.
The chart below illustrates one recent bid for what we consider a high-quality, best-in-class international airport. The light blue line shows the market valuation for the airport based on normalized (i.e., pre-pandemic 2019) earnings, which has generally been in line with most private transactions. However, as the chart shows, the recent buyout offer was at a considerable premium to this metric.
Such premiums to stock prices mean that private equity firms are finding current prices of high-quality listed real assets attractive based on target firms’ long-term growth and cash flow expectations, even as real asset equities have already recovered this year to their pre-pandemic levels. They likely believe, like us, that real asset equities remain undervalued vs. broader markets.
The value to be found in listed real assets means now may be a good time for investors to consider exposure, especially through an active approach that can identify the best opportunities amid today’s takeover trend. Read more by downloading our full Real Assets Monthly.
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