The Savvy Investor Infrastructure Investment section offers members the latest white paper research, commentary and thought leadership articles from the world’s leading researchers and asset managers in the infrastructure marketplace.
Infrastructure is classified as a real asset within the alternatives asset class and as described by M&G as comprising the following investments in three broad groups: core economic infrastructure, social infrastructure, and evolving infrastructure...
Core economic infrastructure pertains to:
- Utilities – e.g., water, electricity (inc. renewables), natural gas, waste management
- Energy – e.g., oil, gas, pipelines, terminals, and storage
- Transportation – e.g., toll roads, bridges, rail, seaports, airports
Social infrastructure pertains to:
- Health – e.g., hospitals, statecare, healthcare
- Education – e.g., student housing, co-habitation
- Civic – e.g., government, security
Evolving infrastructure pertains to:
- Communication – e.g., mobile towers (G network), data centres, fibre optic, satellites
- Transaction – e.g., payments, capital markets
- Royalty – e.g., energy, minerals
Infrastructure investments are long-term assets that are large-scale, physically durable and play a crucial role in the functioning of an economy. They typically have an investment time horizon in excess of 5 or 10 years. Due to their long-term return profile, they are widely utilised by pension fund managers who require exposure to steady inflation-linked income streams which are not overly sensitive to the economic cycle and which have defensive and low volatility characteristics.
Infrastructure investment financing takes place via debt or equity. This can be conducted either privately or via a public listing. Similar to private equity and in order to undertake a project, it is not uncommon for a pension fund to co-invest with another party under a primary investor and limited partner method.
Although infrastructure investments confer diversification benefits, they are illiquid and investment benchmarks, which track their performance, are limited in availability. As a result of their illiquidity, management fees tend to be higher than ordinary listed equity or bond funds.
Today, a lack of infrastructure investment is a concern for governments. The public-private partnership (PPP) model is now viewed as the answer to alleviate the effects of decades of infrastructure underinvestment. This ‘infrastructure investment gap’ – the difference between the current level of investment and future requirements – is estimated by Oxford Economics to be circa 19% over the next two decades.
The UN notes that 68% of the world population will live in urban areas by 2050. As a result of this and the increased electrification of developing parts of the global economy, it is expected that roads and electrical grid investment will represent two-thirds of future infrastructure spend. For investors, Preqin estimate that the median infrastructure allocation in global portfolios could rise from the current 2.2% to 5% as ESG infrastructure investment themes become increasingly important for all stakeholders