Investors are showing increasing interest in infrastructure – the construction of bridges, parking lots and airports – saying they have been seduced by this original alternative to bond investing. Infrastructure finance perfectly illustrates the meeting of local bodies’ need for capital and investors’ search for long-term yields.

 

Under current economic conditions, portfolio creation must take low bond yields into account, along with investors’ desire to limit risk. In this context, alternative investments have appeared on the scene over the last several years, offering higher yields than bonds while guaranteeing a degree of decorrelation from traditional asset classes.

 

Among these alternatives, infrastructure has attracted particular attention. This generic term covers economic activities as varied as transportation, logistics (highway tolls, tunnels, bridges, parking lots, airports, ports), energy and utilities (water distribution and treatment, gas distribution and storage, power distribution and production), telecommunications and “social” infrastructure (hospitals, retirement homes, schools, prisons).

 

The origin of the development of these investments can be traced to the difficulties encountered by states when attempting independently to finance construction and operation of public services and infrastructure. To achieve this, states have been led to increase partnerships with private investors. Infrastructure finance illustrates a matching of local bodies’ need for large amounts of capital to investors’ search for long-term yields.

 

Predictability and stability of income

 

Due to their functions and usefulness, infrastructure assets may be referred to as "the pillars of a community’s development and growth". As an investment, these assets all share the following characteristics: a natural quasi-monopoly position, low dependence of demand on economic conditions, long-lasting assets, and known future costs and revenue, since the latter are often state-regulated. These distinctive elements make infrastructure assets very attractive to investors, since they offer both predictability and stability of income. Furthermore, they offer protection against inflation, as concessions and other service contracts are usually inflation-linked.

 

Infrastructure assets present equally convincing arguments with respect to performance and risk. Predictions for total returns from these investments - dividends plus growth – exceed the average long-term return for share investments. Their characteristics also make them a credible and original alternative to traditional bond investing.

 

Increasing interest in Europe

 

Thanks to these arguments, infrastructure investments are gaining increasing appeal in Europe. The size of investments keeps on growing, as demonstrated by the acquisition and restructuring in December 2006 of UK water utility Thames Water by a consortium led by Australian investment bank Macquarie, for nearly  GBP 8 billion (around CHF 20 billion).

 

An investor interested in this type of asset may buy shares in a listed company or acquire a stake in an unlisted company. The first possibility presents the dual advantage of satisfactory liquidity and short-term growth potential. However, compared with investment in an unlisted firm, volatility is greater, correlation with stock markets is higher, and long-term returns are lower. Therefore, unlisted companies offer the best opportunities for value creation in this area. In any case, one thing is certain: infrastructure must play a role in any study aimed at optimizing an investment portfolio.

 

Frédéric Dawance, co-Head of Investment Services to Private Clients