Pending a final vote count in Florida, the U.S. midterm election results are in with the Democrats regaining control of the House and Republicans maintaining majority control of the Senate. While a split Congress may lead to gridlock on various policies, one thing both parties should be able to agree on is the need for infrastructure investments in the U.S.

The historical under-investment, coupled with the lack of available public-sector funding, has impaired the government’s ability to deliver public services at adequate levels. The American Society of Civil Engineers (ASCE) estimated that $4.5 trillion needs to be invested through 2025 to upgrade the nation’s infrastructure. In its annual report, the ASCE in 2017 gave an overall “D+” grade for the condition and capacity of infrastructure in the U.S., further highlighting the need for additional investment.

Consequently, governments and public agencies have begun looking beyond the traditional funding methods to private investment in infrastructure via privatizations and public-private partnerships (“PPPs”). As a result, ownership and operation of infrastructure assets has been gradually moving from the public to the private sector on a global level. With this trend, the role of government has shifted from the provider of services to that of a regulator. This has provided a stream of investment opportunities and fueled development of a distinct alternative asset class for institutional investors that complements fixed income, public equities, real estate, and traditional private equity investments, and whose popularity is likely to increase as more investments and hence products come to fruition.

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The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

This week’s Chart of the Week takes a look at Master Limited Partnerships (“MLPs”) and their current valuations based on their EBITDA Multiple (calculated by Enterprise Value divided by the 12-month EBITDA). Generally, a higher multiple implies a more expensive valuation. Relative to long-term averages and the S&P 500, MLPs appear expensive today. The elevated valuations, however, are pricing in higher expected rates of growth. These higher growth expectations do not come as a surprise given the recent increase in domestic energy production and expected midstream infrastructure expenditures, which could approach $640 billion between now and 2035.¹  Compared to the prior study done in 2011 ($261B), the 2014 estimates represent a 145% increase in infrastructure spending.

Paying a premium for MLPs relative to historical averages may not necessarily be a bad thing assuming that the estimated growth within the energy infrastructure sector comes to fruition. If, however, there is a catalyst in the market such as a rapid increase in interest rates, regulatory change, or an international crisis, MLPs may experience a correction.

¹ Interstate Natural Gas Association of America