Private Assets

Investing in infrastructure

Mussie Kidane, Head of fund and manager research, Pictet Wealth Management

Investing in infrastructure

Infrastructure assets form the spine of an economy. They are the physical structures and vital services that connect society and facilitate its orderly operation. Typically capital-intensive to construct and with long operating lives, infrastructure assets produce inflation-adjusted revenues that generate long-term, sustainable cash flows. Due to high barriers to entry, these assets also tend to benefit from a relatively low price elasticity of demand.

Estimated at USD 3.1 trillion in 2016, the global infrastructure market is vast and expected to grow by 6% per year. The need to expand infrastructure around the world has become urgent: According to the G20’s Global Infrastructure Outlook[1], USD 94 trillion of investment is required through 2040 in order to prepare infrastructure systems to meet the exponential growth needs of the global economy. In the US, law makers are now working to pass a spending bill of over USD 1 trillion to overhaul and upgrade the nation’s infrastructure.

How to invest in Infrastructure

Direct investments in infrastructure tend to be large-scale and capital intensive, requiring significant capital outlays. However, investors can access infrastructure investment opportunities through both the public and private markets. Global listed infrastructure – comprised of publicly traded companies that own and/or operate essential infrastructure facilities – offers investors easy access to this compelling market segment. Both actively and passively managed funds allow investors to minimise stock-specific risk through diversification. Historically, global listed infrastructure has shown defensive characteristics, with strong upside capture and potentially significant downside protection relative to global equities. Alternatively, investors may choose to invest in private market infrastructure opportunities through investment funds managed by professionals with the capabilities to source, underwrite and operate real asset businesses.

The benefits of investing in infrastructure

The investment case for infrastructure assets is strong:

Attractive risk-adjusted return: As illustrated by the enclosed chart, over the past 15 years, both unlisted and listed infrastructure investments have delivered higher returns than global equities with a lower level of risk.

Compelling and steady income: The asset class generates revenue streams that are generally contracted or concession-based, often with price-adjustments tied to inflation.

Portfolio diversification: Both private and listed global infrastructure exhibits relatively low correlations compared to global equities and bonds, thereby offering portfolio diversification benefits.

Inflation protected income: By nature, infrastructure assets are typically able to increase prices in line with inflation, providing a stable and growing distribution yield over time.

Growth potential of asset class: Privatisation of government infrastructure assets, larger private sector involvement in new projects and a significant replacement cycle all present the potential for high growth.

In the prevailing low-yield environment, infrastructure assets offer attractive and stable yield generated by long-lived and essential assets that produce consistent cashflow streams. The critical need across the world to build, repair and maintain core infrastructure networks, has resulted in record amounts of investment opportunity in the asset class. Given their defensive characteristics, infrastructure investments, particularly in the private asset space, can help investors enhance the diversification of a traditional portfolio, while generating compelling risk-adjusted returns. Due to the relatively illiquid nature of private or listed infrastructure assets, investors should consider their investment time horizons when making such asset-allocation considerations.

[1] Source: Global Infrastructure Hub, G20

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