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 believe 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: transport (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 a predictable return 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.