Alternative Assets: Investing In Infrastructure
FNArena Looks at Investing In Infrastructure (By Shannon Turnbull, 9th June 2023)
FNArena recently covered alternative asset investments in Infrastructure.
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 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.