Five reasons why investors choose infrastructure

Performance characteristics: the perceived stability of infrastructure as an asset class

The key driver of the growth in private sector investment has been the reputed performance of the infrastructure asset class. The perceived stability of infrastructure returns, and the relative underperformance of the bond markets have encouraged new investors in infrastructure and have stimulated expanded allocation strategies among existing investors.

The long-term liability matching obligations of investors (most notably pension funds) are very much aligned with infrastructure investment time horizons and income profiles. The Preqin Unlisted Infrastructure Index demonstrates the long-term strength of the asset class. Over the past 12 years (a typical infrastructure fund life span), Preqin infrastructure has risen from 100 to 255 basis points – on par with the S&P 500 TR (Preqin, 2020).

The extent to which the asset class provides ‘stable’ returns is nonetheless very much premised on the form of exposure to the asset class. Whilst the listed infrastructure sector offers investors liquidity and easy access to the market, the extent to which listed infrastructure mirrors the underlying asset class remains contentious due to the potential impact of stock market volatility. Equally, cash flows are infrequent in the unlisted funds sector. Nonetheless, the strong overall performance of infrastructure funds relative to other forms of private equity investment in this period has added to their appeal.    

ESG, decarbonisation and a growing interest in renewables

The scale of the infrastructure challenge ensures considerable scope for private investment. This, in combination with diminishing public resources, ensures the role of the private sector in the financing and provision of infrastructure will continue to evolve and expand. Institutional investors are increasingly paying attention to Environmental, Social and Governance (ESG) factors. Many infrastructure subsectors, including renewable energy, housing and healthcare facilities, can provide meaningful and tangible alignment to corporate visions at local, national and international scale – without compromising investment performance.

The Paris Agreement on climate change detailed clear targets, meanwhile in the Energy Roadmap 2050, the European Commission (EC) advocates the view that a secure, competitive and decarbonised energy system in 2050 is possible. Decarbonisation targets and pathways across key industry sectors require a radical reform of infrastructure provision, including the design of carbon neutral assets and the decarbonisation of existing assets. National government commitments to address carbon emissions on the back of the Paris Agreement will serve to further extenuate infrastructure funding need.

Technical innovation and societal evolution      

Technological innovation will continue to fuel productivity and economic growth and reshape people’s lives. The underpinning infrastructure necessary to enable and support innovation will, in many respects, always be playing ‘catch-up’. Tech innovation is fast paced and in a continuous cycle of evolution. By contrast, the provision of new infrastructure is a protracted process from planning and design through to operationalisation. From the perspective of an infrastructure investor, for example, innovation in sensor technologies has improved the effectiveness of asset management and (in conjunction with robust asset life-cycle management  plans) has the propensity to prolong the economic life of infrastructure assets. However, the value and benefits of technology are not fully realised within the confines of planning, designing, constructing and managing the lifecycle of the asset.  Moreover, the capacity of technology to foster integration across multi-disciplinary teams and collaboration between the public and private sectors has not been fully optimised.

The expansion and innovation of investment vehicles

Specialist debt and equity infrastructure fund provision has culminated in an expanded and increasingly diverse range of investment opportunities within the infrastructure sector.  Such is the nature and range of private sector investment products (which occupy all dimensions of the risk-return curve) that the misalignment between investment vehicles and greenfield asset development opportunities has been somewhat mitigated. Concerted progress towards addressing the infrastructure investment gap by governments will create further infrastructure investment opportunities for the private sector. The key challenge will be to adequately ‘match’ investor risk-return profiles and expectations with suitable infrastructure opportunities. The most significant challenge remains the mobilisation of the infrastructure project development pipeline.