Getting to grips with a global growth story
Infrastructure investment is the defining global growth story of our time. Approached in the right way, it can create substantial opportunities for portfolio diversification and performance – even as mainstream asset classes struggle to deliver.
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Around the world, infrastructure is a major policy focus and a spending priority as populations expand. The World Bank estimates US$94 trillion of infrastructure investment will be needed by 2040 just to keep pace with economic and demographic change. Fast-developing Asia accounts for over half that total, but the biggest infrastructure investment gap – that is, the gulf between needs and the funds flowing into infrastructure currently – is in the United States.1
Investors can help address these shortfalls while achieving their investment goals. Because infrastructure is a relatively complex and illiquid asset class, it can provide attractive premiums over mainstream assets. It is also aligned with the growing emphasis on environmental, social and governance (ESG) investment. A large portion of new infrastructure investment is of the green variety, with Asia often leading the way. China, for example, poured more than US$44 billion into the building and financing of clean energy technology worldwide in 2017.
By focusing on certain markets and sectors, and investing at different levels of the project capital structure, an infrastructure investment strategy can meet various risk/return appetites and play a range of portfolio roles.
Infrastructure needs to be viewed through a global lens, but making the most of the asset class means basing investment decisions on local market priorities and conditions. To take one example, as local power authorities in the United States prioritise wind and solar energy, promising projects are emerging in the renewable energy sector that combine the potential for dividend yields, steady cash flows and even capital gains from asset appreciation.
In Europe, meanwhile, with banks concentrating on short-term lending and rising demand for structured and secured debt, there is a window for investors to step in as medium-term lenders in sectors such as transport, communications and healthcare. Another compelling, but frequently overlooked, investment case is found in Latin American infrastructure. Countries such as Mexico, Chile and Uruguay boast positive infrastructure funding track records and solid credit conditions, with assets that offer value relative to US peers.
While exploring this world of opportunities, investors need to be conscious of infrastructure’s unique characteristics. Given the massive capital requirements of many infrastructure projects, they often require collaboration or asset pooling to access.
For many investors this means finding a partner with a strong track record specific to infrastructure debt. A robust investment platform can open prospects that would not be possible for even investors of considerable resources to seize alone. And when it comes to infrastructure projects, financial resources are far from the only consideration.
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Infrastructure can be sensitive and often comes with a degree of public scrutiny and government involvement, so knowledge of the local regulatory environment is crucial. Financing and contractual arrangements can be intricate and there may be various ways for investors to participate in a project, from straightforward equity to different tiers of debt, which should be chosen based on project conditions, and investor resources and requirements.
