The American Society for Civil Engineers recently looked at the infrastructure gap within the United States and has graded the country’s infrastructure facilities a D-. Overall, says the Society, $3.6 trillion of investments are needed by 2020 to improve (and bring up to speed) areas such as roads, schools, airports, water systems and more. Given the overwhelming effects of the financial crisis and many municipalities’ inability to budget for infrastructure investment (beyond municipal bond issues), private investment is becoming more influential in producing the infrastructure repairs and builds needed in the 21st century.Many large institutional investment players such as pension and endowment funds have already begun taking advantage of these infrastructure investments as they provide relatively long-term stable investments with great growth opportunities.
U.S. pension funds have lagged behind those in other countries such as Canada, the U.K. and Australia, however, opportunities for joint public-private investments exist and are gaining some momentum.For the individual investor, the philosophy behind the investment is the same as it would be for a large-scale investor. It is a diversifier, with long-term stability and growth potential. “Infrastructure assets are longer-lived, they generally have lower volatility and they are non-correlated to other assets,” notes Earle Goldin, Partner with Alterna Capital Partners.
“When you are building a portfolio it is a good idea to have a fixed income-like asset category, that certain infrastructure assets have, that pays more than a traditional fixed income product.” He adds that an individual investor would want exposure to infrastructure assets because, if appropriately structured, they can provide a higher yield with a modest amount of incremental risk.Unlike large institutional investors who have large sums of capital and can take direct ownership of assets, individual investors are more likely to invest in infrastructure through funds. Generally hedge funds and private equity funds require large sums that are locked up for long periods of time (at least 10 years).Pros to InfrastructureIt’s a business that “takes tolls” which is attractive to investors.The supply and demand fundamentals are attractive for infrastructure (mainly due to monopolistic or semi-monopolistic structures of assets).Demand for infrastructure is steady and not dramatically influenced by economic activity.Pricing is guided by regulation as regulators allow investors to raise price or “toll” linked to inflation.
Larry Antonatos is Product Manager, Global Equities with Brookfield Investment Management. He stresses that individual investors must choose for themselves the best route to take when looking to add infrastructure into their portfolios. However there are two essential ways for investors to achieve this. First, he notes, through private equity pools that own and operate the infrastructure asset. The second way to invest is to a mutual fund or stock portfolio that invests in publicly traded companies that invest in infrastructure.
“Either way,” he explains, “the cash flows that drive the return are very similar in that they are all coming from infrastructure assets.”Antonatos also explains the differences between the private equity pools, which are not valued every day and therefore produce lower volatility as opposed to stock markets, which are valued every day and produce higher volatility. “Still,” he says, “the volatility of listed infrastructure is approximately 75 percent of the volatility of global equities generally.” That is where the lower volatility occurs relative to other equity opportunities, says Antonatos.Another difference is liquidity. Infrastructure stocks offer liquidity whereas private equity funds are locked in for long periods of time. “From an investor’s perspective, it’s a trade-off between volatility and liquidity, but in the end the cash flows are similar,” adds Antonatos.Because the risk associated with infrastructure is less about GDP or economic activity and more about regulatory risk (as they are often highly regulated assets), the diversification impact is different than any other investment one can invest in, which allows for further diversification in one’s portfolio.
For investors with long-term investment horizons, infrastructure can offer low volatility, growth and relative stability. Like any investment there are risks. The decision must be made first with a total portfolio approach in mind and with the recognition that it is not for everyone. Still, the story is a compelling one for individual investors however they choose to incorporate these assets within intotheir portfolios.