Book Reviews | Jun 09 2023
What you need to know about investing in Infrastructure
Infrastructure is a hard asset class to access for investors because the asset size and valuations are large. Therefore it lends itself to big institutional investors and fund managers controlling the market and access. However, if you are looking to invest in this asset class, there are opportunities available in economic and social infrastructure.
Economic infrastructure includes toll roads, bridges, railways and airports. They are physical assets—typically government owned—and have long payback periods for the owners. Social infrastructure is mainly government-owned buildings like schools, hospitals, prisons and government offices that the end user typically doesn’t or can’t pay for directly. They are funded through taxes and public private partnerships (PPP) and have a heavily debt-funded element backed by government cash flows.
Let’s look at infrastructure in more detail and explore the investment options available.
Infrastructure equity and debt
With infrastructure, like other asset classes, you can invest in the equity, debt or a hybrid instrument of infrastructure projects. When you invest in equity, you’re paying to own a piece of the infrastructure. Let’s say a new fancy bridge is being built. When you invest in debt, you’re giving a loan so someone else can own the big bridge. You will own, for example, part of that bridge.
The equity investors place their equity, so ‘they’ own the bridge. But the debt investors may offer to do a senior secured loan at 70 per cent LVR. They’ll take the bridge as security, so until they are repaid, they’ve got security over the bridge. It’s a straightforward senior secured loan, but instead of having a house as security, they’ve got a bridge.
How to invest in infrastructure
As infrastructure normally includes enormous assets worth huge amounts of money, it’s difficult for a single-person investor to get access. The only real way to access diversified infrastructure investments is through a fund that has billions of dollars to invest. The large super funds in Australia have traditionally been the ones involved in infrastructure.
Back in the 1990s, the average investor could access infrastructure by buying listed equities that own or develop the infrastructure, such as Transurban, or by investing in global unlisted funds or the few local private infrastructure funds.
If you take equity in infrastructure via a listed operating business, you take on operational risk rather than pure exposure to the physical asset. You could take units in a listed infrastructure fund, and you can also invest in single infrastructure funds.
Public private partnerships
A PPP is a partnership between the public and private sectors, where the government partners with the private sector to deliver infrastructure and related services over the long term with a risk-sharing arrangement. The private sector builds the infrastructure and operates (or contracts to operate) the asset over the duration.
The debt in PPPs (often twenty to thirty years) is quite investable. It tends to be a long-dated and lower return asset, and typically has some form of CPI (inflation) linkage. This could be a Capital Indexed Bond (CIB), where the capital to be repaid accretes with inflation like a zero-coupon bond but accreting at the variable rate of inflation.
Alternatively, it could be an Index Annuity Bond (IAB), where your coupon ratchets up at the rate of inflation, so that over time you would expect your absolute coupon to go up.
The equity for these projects usually remains with the project sponsor, or group of sponsors, who tend to be large institutional investors or infrastructure funds, which is why access to buying the equity in listed infrastructure companies or infrastructure funds is limited.
Infrastructure investment requires significant upfront financial commitments and returns not realised for the long term. Be sure to assess the risks involved as these types of investments can be complex.
Edited extract from Grow Your Wealth Faster with Alternative Assets (Wiley $34.95) by Travis Miller. Travis is co-founder and CEO of iPartners, a leading Australian alternative asset marketplace with approximately $5B in funds under management. He is passionate about improving access to alternative asset investments and educating everyday investors about a broader range of investment options. Find out more at https://ipartners.iplatforms.com.au/
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