Investing in infrastructure has become popular among institutional and private investors in recent years. Investors could be attracted to the potentially long-term, low-risk and inflation-linked profile that can come with infrastructure assets, and they may find that it is an alternative asset class that could provide new sources of return and diversification of risk.
Why Consider Investing in Infrastructure?
Infrastructure assets provide essential services that are necessary for populations and economies to function, prosper and grow. They include a variety of assets divided into five general sectors: transportation (e.g., toll roads, airports, seaports and rail); energy (e.g., gas and electricity transmission, distribution and generation); water (e.g., pipelines and treatment plants); communications (e.g., broadcast, satellite and cable); and social (e.g., hospitals, schools and prisons). Infrastructure assets operate in an environment of limited competition as a result of natural monopolies, government regulations or concessions. The stylized economic characteristics of this asset class include the following.
- Relatively steady cash flows with a strong yield component: Infrastructure assets are generally long lived. Most companies have long-term regulatory contracts or concessions to operate the assets, which can provide predictable performance over time. As a result, infrastructure assets have the potential to generate consistent, stable cash flow streams, usually with lower volatility than other traditional asset classes.
- High barriers to entry: Due to significant economies of scale, infrastructure assets are often regulated in such a way that discourages competition. The high barriers to entry often result in a monopoly for existing owners and operators.
- Inflation protection: Revenues from infrastructure assets are typically linked to inflation and are often supported by regulation. In certain instances, revenue increases linked to inflation are embedded in concession agreements, licenses and regulatory frameworks. In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases, due to the essential nature of the assets and their inelastic demand.
Consequently, the infrastructure asset class may provide investors with a degree of protection from the business and economic cycles, as well as attractive income yields and an inflation hedge. It could be expected to offer long-term, low-risk, non-correlated, inflation-protected and acyclical performance.
It is also generally believed that infrastructure is, as an asset class, poised for strong growth. As the global population continues to expand and standards of living around the world become higher, there is a vast demand for improved infrastructure. This demand includes the refurbishment and replacement of existing infrastructure worldwide and new infrastructure development in emerging markets.
Financing public infrastructure has traditionally been the responsibility of the state. However, fiscally constrained governments are increasingly turning to the private sector to provide funding for new projects. As a result, the investment opportunities in this sector continue to grow.