Introduction to Infrastructure
Infrastructure investments offer potential for steady returns and predictable cash flow. An ETF may help smaller investors who cannot easily invest directly.
An Infrastructure Investment Gap
Infrastructure assets are the basic physical systems of a nation and vital to a country’s economic development and sustainable growth. However, the deep disruptions caused by COVID together with the upcoming threat of recession and political instability has contributed to an increase in the imbalance between needs and funding.
According to the World Bank, gaps in the quantity of infrastructure per capita are remarkable in many countries. Nevertheless, many countries often lack sufficient fiscal capacity and domestic savings to address the infrastructure gap.
Given the scale of resources needed to address the estimated gap in investment, countries are increasingly turning to the private sector for financing. Prequin estimates that global private infrastructure AUM is likely to double over the next five years, reaching $1.9 trillion and overtaking real estate as the largest real asset class.
Infrastructure as an Asset Class
Infrastructure as an asset class may be underdeveloped but it is not new. Infrastructure — alongside hedge funds, real estate and private equity — is part of the growing pool of alternative assets moving their way into normal investor allocations.
Infrastructure investment has a number of key benefits:
- it has low correlation with traditional assets
- it is less sensitive to business cycles
- it is long duration and inflation linked
This could be particularly interesting for UK pension funds where there is an inadequate supply of inflationlinked assets to meet the demand. In many cases — for example, toll roads — infrastructure also offers predictable long-term returns with stable cash flows.
Accessing an Infrastructure Investment
There are various investment vehicles that can be used to access infrastructure, ranging from direct investment in private funds, to mutual funds and ETF, each with its own potential benefits and drawbacks. An infrastructure ETF may offer opportunities for investors large and small. For larger investors, it can serve as a temporary home for committed but invested capital – or “dry powder”. For smaller investors, an infrastructure ETF offers a more easily accessible investment solution in a regulated, open-ended vehicle.
In our new whitepaper, we evaluate the different investment vehicles available to infrastructure investors, and review the merits of using a multi-asset exposure option.