Infrastructure Investing

What is Infrastructure Investing? top

Infrastructure as an alternative asset class encompasses investment in the facilities, services, and installations considered essential to the functioning and economic productivity of a society (Source: Prequin, 2023).

Infrastructure became its own asset class in recent decades to close the government infrastructure-funding gap via the privatization of state utilities, telecommunications, and transportation. The American Society of Civil Engineers estimates the total US funding gap at $2.5 trillion between 2020 and 2029 and $15 trillion. Governments cannot afford to make all of these investments, so projects are increasingly turning to private markets for capital.

Investors are drawn to this asset class as it has the potential to provide stable cash flows and strong risk-adjusted returns across various market and economic environments due to its non-cyclical nature.

According to Prequin, this asset class has tripled since 2008 with over $550 billion in the last decade alone (2023).

The sectors within the Infrastructure asset class are categorized as either economic infrastructure or social infrastructure (see image below).

Economic Infrastructure

• CleanTechnology
• Energy
• Logistics
• Natural Resources
• Power Utilities
• Renewable Energy
• Telecommunications
• Transportation
• Waste Management
• Water

Social Infrastructure

• Defense
• Education
• Government
• Healthcare
• Judicial

Stages of Infrastructure Projects top

There are generally 3 stages for infrastructure projects: Greenfield, Brownfield, Secondary Stage. These stages are summarized below.

Greenfield

• Developers have only basic plans (early stage) or have solid plans with stakeholders identified (late stage).
• This stage is the riskiest of the 3 stages because of the high cost of planning and development, no income, and uncertain future demand and pricing.

Brownfield

• The asset is already operational and generates income but the project may need improvements or repairs (eg, Toll bridges).
• This stage is less risky than the Greenfield stage.

Secondary Stage

• The asset is fully operational and generates predictable income.
• This stage is lower risk than Greenfield or Brownfield stage.

Infrastructure Strategies top

There are 5 types of infrastructure strategies that span the risk/reward spectrum.

Debt

• Projects financed by mezzanine debt, preferred equity
• Typically lowest risk/reward

Core

• Low risk/low return
• Long-term stable cash flow & demand
• Ex: Toll roads, highways, airports

Core-Plus

• Higher risk/ higher returns
• Typically Secondary Stage investments
• Demand can fluctuate
• Ex: Resorts

Value Add

• Moderate-to-higher risk/higher reward
• Asset can require repairs/ enhancements

Opportunistic

• High risk/high return
• Assets need to be constructed
• Typically Greenfield projects

Infrastructure Strategies By Risk/Reward Profile

Infrastructure Benefits & Risks top

Below are some of the potential benefits and risks associated with investing in infrastructure.

Benefits

• Income/stable cash flow
• Downside protection
• Inflation protection
• Longevity of assets; stable demand
• High barriers to entry (eg, airports)
• Diversification

Risks

• Capital intensive
• Illiquid
• ESG risk
• Regulatory Risk
• Political Risk
• Completion Risk
• Demand Risk

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