“You and I come by road or rail, but economists travel on infrastructure.”
— Margaret Thatcher
Summary
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Thriving interest and investment inflows have accelerated private infrastructure’s market cap growth by nearly 26 times ($5B to $1.3T) since the turn of the century.
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The sector largely benefited from investors seeking mature assets with downside protection, inflation resistance, contracted cashflows, and upside potential.
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Infrastructure is critical for any functioning society, and it is often supported by government legislation or subsidies, increasing full-cycle resilience.
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Countries burdened with debt lack the financial resources to meet infrastructure needs and increasingly turn to private capital to fund projects.
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Airports, roadways, and other forms of infrastructure exhibit monopolistic qualities due to their high barriers to entry, lower competition, and long operational lives.
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Although globally successful in recent years, regional and sectoral trends emerge upon closer inspection, strengthening the case for diversification.
What are private infrastructure investments?
Broadly speaking, infrastructure falls into the wider category of real assets—ones that are tangible, such as commodities, housing, hospitals, or bridges. Financial assets, like stocks and bonds, stand in contrast.
The introduction of private infrastructural investments goes back to the 1990s, when the Australian government began the process of privatizing public sector assets, ranging from airports to electrical grids. The decision was made to help sustain mandatory occupational pensions, whose fund managers were eager to capitalize on investment opportunities with long-term, monopoly-like cash flows.
Why does fund structure matter?
Eventually, other countries began to follow suit. As more pension funds poured into private infrastructure for enhanced diversification, inflation protection, and robust returns, mid-sized institutional investors quickly recognized its value. Without the scale to invest directly, open-ended fund structures were introduced. These fund-based solutions have no fixed end date, are open for new investors or reinvestment, and provide regular liquidity to clients.
On the other end of the spectrum, there are closed-end funds. These structures raise capital over a specific period, restrict new investments, and typically lock in capital for 10 to 12 years, returning it automatically at the end of the fund's life cycle.
In terms of capital flow, flexibility, and meeting individual investors’ needs, the difference between the two can be quite dramatic, illustrated in the charts below. A smoother ride to the top is something to be appreciated
Why has private infrastructure grown so quickly??
The popularity of private infrastructure (among other alternative investments) soared as more and more investors realized how it can strengthen a portfolio; what was once considered a niche asset class has begun to be considered a key component of asset allocation.
It isn’t all that surprising once you tally the benefits.
Essential long-life assets: As critical features of a functional society and growing economy, core infrastructure assets are built with the intention of operating for decades before being replaced or overhauled.
High barriers to entry: Tight regulations and oversight are to be expected for such vital contributors to the public, and with long lead times for new projects as well as expensive capital expenditures and operational costs, competition isn’t very common.
Cash generation: Given the above, infrastructural assets often exhibit monopolistic traits. As necessities for a growing population with little competition, infrastructural assets have strong pricing power via contractual agreements that provide transparent future cashflows.
Inflation protection: Assets with multi-decade operational cycles and standing contracts tend to have clauses that account for the perpetual erosion of a dollar’s value, or, in other words, inflation. As the cost of goods rises, so do the revenues generated by this asset class.
Government support: In a world where nations are saddled with astonishing levels of debt, governments are still expected to foster an efficient environment and encourage investment into their lands. Without the financial resources to do so themselves, they continue to rely on favourable policies, subsidies, and the like to attract external commitments.
Enhanced diversification: In an increasingly complex investment landscape, the traditional 60/40 balanced portfolio, once considered the gold standard for diversification, is less efficient. With a low correlation to stocks and bonds, this asset class can broaden the efficient frontier, or, more specifically, the opportunity set that can capture the highest expected returns with the lowest portfolio-wide volatility.
What are greenfield and brownfield infrastructure projects?
At first glance, the names aren't exactly intuitive, but imagine grass and tilled soil—one is fresh and untouched, the other is worked land. The same principle applies here; greenfield projects are new, proposed builds, whereas brownfield infrastructure denotes an investment made into an existing facility or service provider.
Greenfield projects typically carry higher risk, as the asset hasn’t proven its capability to generate revenues just yet. These investments often aim for capital appreciation, with the ultimate goal of developing real assets for sale.
On the other hand, brownfield infrastructure usually comes with a certain track record of revenue streams. If lacklustre, investors may seek to underwrite potential deals and discount them accordingly in order to improve efficiency and profit margins. If the asset is delivering strong yields, investors can step into established winners.
Well-structured portfolios have room enough for both, but the most important aspect to consider is which asset allocation aligns with your risk profile, immediate needs, and long-term goals. Understanding regional differences and legislation can also play a pivotal role in determining which of the two is preferable. For greenfield projects, zoning issues may arise, and the uncertainty of acquiring permits could tie up capital on vacant land without much future guidance. Conversely, when renovating and converting brownfield infrastructure from industrial facilities to residential units in a region with prominent public safety laws, extensive (and expensive) soil remediation may be required. Understanding global laws, regional differences, and national trends can be daunting—this is where working with expert professionals can add value and help maximize your chances for success.
How does geographical location influence infrastructure?
The starkest difference comes from the country’s relative income levels. High-income countries (HICs) have consistently transacted more primary investments in the private infrastructure market than middle- and low-income countries (MLICs) every year since 2013, except for lagging slightly in 2018.
Deal size also played a pivotal role; for example, in 2022, deals made in HICs accounted for 71% of the total dollar value. Nearly 94% of those transactions focused on renewable energy, storage, and transmission projects in Western Europe and North America.
Here lies the appeal for global diversification. Western Europe and North America may be establishing their prominence as top investment destinations today, but Asia was the hotbed pre-pandemic. It’s difficult to forecast which regions will attract infrastructure capital (encouraging policies, population needs, development capacity, lax regulators, political stability, etc.) sustainably, and given how quickly conditions can shift over the years, diversifying across different countries can help optimize the efficient frontier of opportunity.
What does vintage year mean for infrastructure?
Despite their length, infrastructure investment contracts eventually expire, so it's important to have exit plans in place. Similar to spreading investments across the globe, diligent fund managers do so with time. The reasons for doing so are threefold.
Entry conditions: Purchasing a house in 2020 came with much kinder conditions than doing so today. With better financing options and lower real estate prices, what many could afford then is suddenly out of reach. Investments in infrastructure can also suffer from volatile conditions. By entering into agreements across various years, fund managers can smooth out their cost basis and upside opportunity.
Exit conditions: Selling into a down market is never ideal, and it’s almost impossible to predict whether the conditions will be in your favour 10 to 12 years from the day you sign. As such, committing capital across several different points in time can help derisk exit strategies. Further, by having a window of opportunity to sell (or the option to temporarily extend the fund’s life cycle) the underlying asset, fund managers can strategically exit in a more favourable environment.
Reinvestment risk: The minimum commitment costs of private infrastructure investments are incredibly steep compared to purchasing shares in a public company. Like the former two points, conditions are paramount. If every penny of investment returned to your account as liquid capital during poor conditions, you’d be put in the difficult spot of either not participating in the market or investing in potentially unsuitable securities. Dispersing your returns over time, then, provides more chances to reinvest with confidence.
Is private infrastructure poised for future growth?
Keeping a pulse on macroeconomic conditions and learning how to identify trends—or associated opportunities—can serve any investor well. Two stand out among the crowd: the transition to sustainable energy and global digitalization.
Energy transition and sustainable infrastructure
Although the Paris Agreement was signed by almost 200 nations in 2016, many are far, far behind in reaching their targets. With time ticking away, governments hoping to meet their commitments will likely need to fast-track their green initiatives to put net-zero targets within reach.
While solar, wind, and hydro are the first forms of power generation that come to mind when discussing greener pastures, we will likely use transitionary resources to make the shift feasible. Liquid natural gas (LNG), the cleanest fossil fuel available, should benefit during the interim; Shell estimates a global demand increase of over 50% by 2040. Processing facilities to extract pure products from raw gas streams may become more sought after, and LNG terminals will be required to manage imports and exports.
Some have even ventured as far as reclassifying nuclear energy as a sustainable source of energy. As reactors extend their licenses or closed facilities resume operations, uranium producers could return to favour to meet growing demand.
Digital infrastructure
The digital world is managed, ultimately, in the physical world—almost 1.5 million kilometres of fibre optic cables line the ocean floor, serving as the backbone of the internet and modern information age.
More recently, data centres and cloud computing have become almost as important as the spiderweb of submarine cables. eCommerce and the digitalization of the broader economy certainly kickstarted the boom, but with AI and related technologies slated to push the limits of existing infrastructure, future investments will be needed to expand capacity.
The synergy between the two trends, in fact, is almost poetic. AI requires tremendous amounts of energy, and as businesses, consumers, and entire countries begin to alter their practices to leave fossil fuels in the past, greener energy sources may need to step in and fill the gap.
Bellwether’s Approach
If you have opportunities to partner with industry leaders, take them. Much like our business management philosophy as a whole, we believe that when you let everyone focus on what they do best and work towards a common goal, the journey there becomes much easier.
We can offer our clients access to a broad range of premiere private investment solutions diversified across asset types, vintage years, term length, regionality, field status, cash flow structures, and more by collaborating with best-in-class fund managers.
As portfolio managers, we’ve taken our century of experience with due diligence to craft a strict set of criteria and uncover well-established, proven managers investing in specialized markets. Ongoing monitoring and research of additional opportunities allows us to adjust, restructure, and enhance our Global Real Estate & Infrastructure Fund to better serve clients by offering a more comprehensive solution.
Beyond that, our portfolio management team practices global vigilance. By keeping a close eye on the world’s economic state, political developments, cyclical pressures, international demand, and more, we can identify emerging trends. From there, we source partners who are in an ideal position to capitalize on them and resume our search for the next opportunity.
Finally, we also believe that everyone should have equal access to equal opportunity. Through our pooled funds, our clients can access institutional-grade strategies that would otherwise be out of reach for them. Not everyone has millions of dollars to commit, and further to that point, even fewer are comfortable with a closed-ended fund system where that capital is tied up—our sleeve of tactically selected public investments provides weekly liquidity as needed, effectively opening up closed-ended funds and providing greater flexibility for client needs.
Infrastructure is fundamental to any functioning society, and it appears that it's becoming similarly important for investment management as well. If you’re interested in elevating your portfolio, we’re ready when you are.
Investing in private infrastructure involves risks, including market volatility, limited liquidity, regulatory changes, and operational challenges. Infrastructure investments may be affected by economic conditions, interest rates, and political factors.
