Why invest in Infrastructure?
Infrastructure as an asset class is increasingly attracting institutional capital, due to the stable growth of the investment and the socially responsible nature of the investment. Institutional investors find themselves in a new market environment, where fixed income investments have been continually depressed, resulting in a need to find viable alternatives. Whilst infrastructure investment was once typically the preserve of the state, fiscally constrained governments are now opening investments to the private sector to secure funding for infrastructure projects, which has created a global opportunity for infrastructure investment.
Infrastructure as a steady investment:
As part of a long term investment strategy, infrastructure represents a stable investment with stable cash flows. Compared to fixed-income investments such as government bonds, of which the returns of the ten year variety are listed below (Table 1), infrastructure investments outperform the fixed income investments consistently on a returns basis. This is all the more important because Stirling Capital Partners’ research found that the most comfortable infrastructure investment holding period for investors in 2014 was 10 years or more, with 69.7% of respondents selecting it as their ideal period (Stirling Capital Partners 2015 Survey). Table 2 shows the MSCI Infrastructure Index between the years 2001 and 2014; despite variations due to stock market volatility in 2000-2 and 2008, there was a gross yield of 6.13% over the years 2001-2014. This shows that infrastructure is able to weather stock market fluctuations, and that over the duration of an investment infrastructure will likely to still develop a greater return than a fixed income investment such as a ten year US Treasury bond, which developed only a 3.71% yield over the same period (Table 3). The reason behind infrastructure investments’ ability to endure short term market fluctuations is that most infrastructure investments operate on a long term contract, or have revenues determined by regulation. This regulation can lead to a near monopoly of sectors, in which new arrivals in the market may find it extremely difficult to compete, which gives certain investments security against competition. Many infrastructure investments also contain a natural hedge against inflation; incomes from infrastructure such as utilities or tolls are inflation linked, which maintains the value of the revenue of the investment. It is also key to note that during an economic downturn, consumers continue to use essential infrastructure such as transport or utilities. It is therefore possible to conclude that institutional investors are increasing their allocation into infrastructure because they seeking a long-term yet higher yielding alternative to fixed rate investments to add diversity to their portfolios. Stirling Capital Partners provides institutional investors with in-depth analysis on each prospective investment using its both global relationships and its own internal research as part of a due diligence analysis on behalf of clients who are unable to do so themselves.
The rapidly expanding global demand for infrastructure investment:
As the world population continues to increase and living standards continue to rise, both developed and developing nations will seek ever more infrastructure investment to meet the needs of their populations. This provides demand for investment by institutional investors as either debt or equity providers which is not currently being met. The World Bank states that “this strong unmet demand for infrastructure investment in EMDEs is estimated at above US$1 trillion a year.” (EMDEs: Emerging Markets and Developing Economies). Emerging markets such as India rely heavily on infrastructure such as railways constructed during the colonial period which is now coming to the end of its intended lifespan, and as such are now opening to investment to bring it up to the standards of the 21st century. Investment in high-quality, sustainable infrastructure can provide basic services to households and provide market access for agriculture; enable sustainable urban development, leading to productive gains for industry and opening corridors of trade for poor and landlocked countries to the global economy. Infrastructure investment is also in greater demand in developed nations due to the outdated infrastructure in prevalent in these countries. This is such a problem that the American Society of Civil Engineers has stated that the USA needs $2.7 trillion in investment into its infrastructure by 2020, of which only about $1.6 trillion will be available. It is therefore clear that there is great demand for infrastructure investment in both the developed and developing worlds that is not currently being met, providing great potential for institutional investors over the coming years. This investment can be either direct or indirect, and Stirling Capital Partners both sources investment opportunities and offers advisory services to investors on which approach is most suitable for them, finding asset managers when an investor may need such services.
Infrastructure as a socially responsible investment:
Infrastructure plays a critical role in growth, competitiveness, job creation and poverty alleviation both in the developed and the developing world, aiding social mobility and helping to progress towards a more climate concerned world. Weak and undeveloped infrastructure limits economic and social opportunities in developed and undeveloped countries alike, which highlights the need for investment as part of a wider strategy to combat inequality.
In comparison to other types of investments, such as volatile stock markets and bonds with low returns, infrastructure investments provide lower risk than stock markets and higher yields than bonds. There is also huge potential for infrastructure investments to grow as part of a portfolio due to the funding shortfall between demand for infrastructure investment on a global scale and the capital currently available for that investment. Stirling Capital Partners advises investors about these opportunities and provides growing expertise into this new and growing asset class on a global scale.
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