Altamar has recently edited, with the collaboration of John Siska, the “Targeting Infrastructure” report, the fourth in a series that we launched in 2017 to offer our clients tools that can be of help to structure an investment program suitable for their objectives. In this summary of the report, we wanted to reflect the characteristics that have made infrastructures one of the fastest growing private asset classes.
Infrastructure encompasses assets from a wide variety of sectors that have a direct impact on the competitiveness of the economy of a region or country: transport, energy, water distribution and sanitation networks, telecommunications and social infrastructure. A good definition could be “any asset essential for the wellbeing and quality of life of a community and its people, be it global or local and that affects basic services such as electricity, water, transport, communications or health”.
While infrastructure assets are not new, the novelty is that they are attracting more and more private capital. Why is this happening? There are high infrastructure investment needs globally and the public sector does not have sufficient capacity to meet them, resulting in a $350 billion a year shortfall in investment needs to be met with private capital. It is this need for private capital participation that makes infrastructures have several unique economic characteristics: they present stable and predictable cash flows thanks to the contracts or regulations that underpin them, high protection to inflation and interest rate hikes and have the ability to generate recurrent cash yield.
All these features mean that the investment in infrastructures offers really attractive risk-adjusted returns, presenting low volatility and low correlation with other assets, thus providing a positive effect in terms of diversification of an investment portfolio. The great advantage is that these returns (above both fixed income and equities) are independent of macroeconomic cycles. Besides, infrastructure investors capture illiquidity risk premia and generate alpha on the back of operational value added. This strong performance is resilient throughout the cycle in such a way that the asset offers downside protection in adverse macro scenarios.
Infrastructure companies deliver real benefits and the best projects provide, connect and produce sustainable outcomes. According to McKinsey, it has a socioeconomic rate of return of 20%, i.e. one dollar of infrastructure investment can raise GDP by 20 cents in the long run. In this sense, as governments recognize the power of infrastructures as a lever for economic growth, they facilitate the flow of private capital that as we have seen, is critical to meeting infrastructure needs.
And what are the main challenges that infrastructure investors face? Regulatory certainty is undoubtedly the most appreciated and determining factor for “core” projects and the ability to manage complex projects for value-added investments.
Over time, infrastructure has emerged as a distinct asset class itself and whose weight in the portfolios is increasing. Large Canadian and Australian pension funds pioneered this development, but today’s investor base has broadened to all types of institutional investors, especially the insurance sector and Family Offices. Today, infrastructure represents 8.5% of the investable global private asset pool and is the fastest growing private asset class with great future prospects.