Against a backdrop of shrinking returns from traditional investment fund strategies, alternative asset classes are more popular than ever. Most notable among these is infrastructure investing, which is seeing a boom. Andrew Maiden, director of fund services at Intertrust, looks at the rise of the sector and explains why it's so popular.
As an asset class, infrastructure investment is fast becoming a "must have" component of many portfolios with tremendous growth being seen throughout the sector.
The European Commission estimates that, in order to meet the UN's Sustainable Development Goals, around $12tn of infrastructure investment is needed between now and 2030. With infrastructure being the essential facilities and services upon which the economic productivity of society depends, there is a huge responsibility on governments to raise and spend the necessary funds to maintain and install new infrastructure and this presents significant investment opportunities for the private sector.
Austere governments are reliant on the private sector to contribute funds for infrastructure projects which can be as costly and time consuming as they are necessary. The need for capital has resulted in an industry that is as big as it has ever been and continues to grow.
Alternative assets are increasingly popular thanks largely to the shrinking returns available from traditional investment strategies. The advantage of the infrastructure investment class is that it is still relatively untapped so escapes the saturation that has befallen the likes of the prime commercial and residential real estate markets in recent years. Infrastructure can also offer consistent growth cash flows and returns that are not correlated with other asset classes.
Infrastructure investing has been a common element of institutional investors' portfolios for a while now but its increasing popularity comes from the likes of pension funds and sovereign wealth funds which are viewing direct infrastructure investment as a viable option for expanding their portfolios.
The sheer necessity of infrastructure investment for governments around the world also contributes to the attraction of the class; opportunities in the developed nations and OECD countries continue to be seen but with valuations becoming higher and deal win rates reducing, the emergence of developing markets such as Africa are now also starting to offer new investment opportunities and potential returns, albeit with correlating risks associated with investing in this part of the world. A geographic spread can bring further diversity to investors' portfolios; another incentive to invest wisely in infrastructure.
A varied class
Infrastructure requirements are vast and so the options for investment are incredibly varied; a further pull factor for the class. Different risk and return characteristics apply to the class depending on the lifecycle of the type of asset.
The infrastructure theme encompasses everything from Greenfield assets – new projects which are approaching or under construction – to mature assets which are fully operational assets that are already generating revenues. The former has potentially higher returns but also represent a higher level of risk, with managers needing to exercise caution when investing in order to match risk vs investor requirements, as with any asset class.
Increasingly common is investment in technological infrastructure; a sector which is growing thanks to the continued digitisation of developed societies especially. This includes data centres, mobile phone antennae and fibre optic technology.
Dedicated infrastructure funds are a popular avenue for accessing this sector as they provide investors with expert advice and access to projects which they may not necessarily be able to access on their won. When selecting a manager to invest with, investors need to be mindful of choosing a manager that is really performing well, rather than one who has just benefited from the overall strong performance across the asset class.
The jurisdiction in which to set up structures for infrastructure investment is another important choice. Guernsey is well placed to carry out this work as it is already home to some of the world's best-known infrastructure managers as well as having a strong track record on regulation, asset protection and expertise.
The road to profitable investing can be rocky but infrastructure certainly presents a clear opportunity so long as you have a good roadmap in the form of a sound strategy and an experienced, expert manager to act as the driver.
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