A Study on Infrastructure Investments

In recent years, a new asset class investing in the infrastructure of a nation has been classified for use in asset allocation models.  What is infrastructure?  It is commonly known as assets in the transportation, telecommunications, electricity and water sectors.  Emerging and developed nations need to build out their infrastructure for different reasons.  The former due to population growth and economic development.  The latter to upgrade and replace existing infrastructure.

Usually, these projects would be financed by local or national governments.  The developed world is still recovering from the credit crisis in 2008 and dealing with the continuing Eurozone situation.  The emerging world, other than China, does not have the financial resources.  They are unlikely to meet global need for infrastructure investments.  This could be as high as US $70 trillion for 2005 to 2030.  Hence, the call for private investors such as pension funds and private equity firms.

Investors may invest directly into infrastructure assets through Public Private Partnerships or project finance structures.  They are exposed to disadvantages such as liquidity risk, very long investment time horizon, political risk, concentration risk, regulatory risk and high capital requirements.  They can buy securities of companies directly or buy funds/indices in sectors related to infrastructure.  The reduces all risks except for political and regulatory.  Market risk is higher in this case.

In the article Risk, Return and Cash Flow Characteristics of Private Equity Investments in Infrastructure in the Alternative Investment Analyst Review, Florian Bitsch, research assistant at the Center for Entrepreneurial and Financial Studies; Axel Buchner, postdoctoral researcher at Technische Universitat Munchen and Christoph Kaserer, professor at Technische Universitat Munchen obtained detailed private equity deal information, including monthly cash flow data, from the Center for Private Equity Research for 363 infrastructure and 11,223 non-infrastructure deals from January 1971 to September 2009.  The deals had to be exited and spanned the alternative energy, transportation, natural resources, energy and telecommunications sectors.


From the data they find:

• Infrastructure investments have shorter time horizons
• Infrastructure investments are twice as big as non-Infrastructure deals
• Infrastructure does not offer more stable cash flows
• Infrastructure investments have higher returns and lower risks.  They have lower default rates and better returns than non-infrastructure deals.
• Brownfield investments of established companies have lower risk and default rates.  They have better returns than greenfield investments.  Private equity and venture capital deals were used as proxies.

The factors affecting fund performance were:

• Excess investment capital does not bid up asset prices for infrastructure deals as it does for non-infrastructure
• Data is inconclusive that infrastructure investments are an effective hedge against inflation
• Infrastructure deals are correlated to the markets
• Infrastructure deals are not correlated to the broader economy, as defined as GDP
• Infrastructure and non-infrastructure deals are negatively affected by interest rate changes
• Fund manager experience has no influence on returns
• Longer dated deals have better returns as poorly performing deals are exited quickly
• A fund requiring additional rounds of financing usually have poor returns
• The size of the deal does not affect infrastructure deal returns
• European infrastructure deals have the best performance
• Transportation is the best performing sector