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Infrastructure investments – categories, forms, risk and return

Infrastructure investments are investments in real, long-term capital-intensive assets that are intended for public use. Such investment can take a number of forms, for example, an investor may sell or lease the assets to the government or operate them to earn revenue. If an infrastructure asset is operated by an investor, the inelastic demand and high barriers to entry (due to government regulation and high costs) provide a competitive position.

Infrastructure assets may offer:

  • Stable cash flows,
  • Low correlation with traditional assets,
  • Inflation protection and
  • capital appreciation.

They are particularly well-suited to investors with long-term horizons, such as pension funds.

Categories of infrastructure investments

Infrastructure assets are categorized based on the underlying assets, typically into economic and social infrastructure:

  • Economic infrastructure assets are critical for economic growth such as transportation assets (road, bridges, railways, airports, etc.) and utility assets (electricity, gas, water, etc.).
  • Social infrastructure assets include assets such as schools, hospitals, etc.

Infrastructure investments may also be categorized based on the stage of development into:

  • Brownfield, which are existing infrastructure with some financial and operating history, and
  • Greenfield, which are to be constructed.

Forms of infrastructure investments

Even though direct investment provides control over the asset and ability to capture its full value, it requires concentration, is illiquid and must be managed and operated. This is why indirect investment is more common. Indirect investment vehicles include shares of companies who own infrastructure, ETFs, listed funds, private equity funds, and unlisted mutual funds. Publicly traded funds, even though they make a small part of infrastructure universe, offer liquidity, transparency and diversification benefits.

Master limited partnerships (MLPs) are exchange-traded pass-through vehicles like REITs.

Risk and return overview of infrastructure investments

Investments in brownfield projects (through an MLP) with steady cash flows are low risk but they are also low growth. In order to earn high returns, an investor must consider riskier investments such as a greenfield project by a private equity fund.

Risks include:

  • Revenue being different from expected,
  • Financing risk (due to the use of leverage),
  • Operational risk,
  • Construction risk,
  • Regulatory risk (governments may regulate prices of essential assets), and
  • In case of global investments, currency, political and profit repatriation risks.

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