Infrastructure can be defined as the essential services, facilities and structures which societies and economies depend upon. A rising middle class throughout the world and the shift towards urban living has made infrastructure spending a priority for many emerging and developed market economies. For investors it offers the opportunity for long term, inflation protected cash flows and attractive yields.
Infrastructure assets are typically characterised by a number of features – their long asset life, the ability to protect against inflation through concession agreements or other long term contractual arrangements, low correlation to other asset classes, their monopolistic nature, stable cash flows and inelasticity of demand and therefore resistance to economic cycles.
The two broad categories of infrastructure investment are distinguished by the stage at which market participants enter the space; greenfield investments are made in the riskier, early stages of development and brownfield refers to investments made in already operational facilities. Within these categories, there are different ways to gain exposure; either through direct investment, pooled funds (listed and unlisted), listed equity or debt instruments, each providing differing levels of control and liquidity, resources required for achieving diversification and correlation to the general stock market.
Direct investments typically offer the highest level of control and the lowest correlation, however substantial resources are required to avoid concentration risk. At the other end of the spectrum are direct investments in the equity of listed companies which are highly liquid, but more influenced by general stock market activity. Listed and unlisted funds lie somewhere in-between. Infrastructure debt is rising in prominence due to low observed default rates and high default recovery, low-risk, steady income streams and a long dated liability profile. To mitigate potential political, regulatory, legal and construction risk a balance between regulated and non-regulated assets should be sought.