Does Infrastructure as an Asset Class Yield Long-Term Returns?
Falling bond yields globally have encouraged investors to take more risk, buying assets such as junk bonds. Logically, though, they would do better to invest in infrastructure.
There is certainly a need for their capital, at a time when government budgets are stretched to the limit by the costs of Covid-19 support, and infrastructure plays an important part in growth strategies.
Quantifying expectations of growth in this area, consultancy PwC forecasts that assets in infrastructure funds could double to approximately US$2trn by the end of 2025, given the need to refurbish roads, airports, and hospitals, and to finance accelerating developments in areas such as 5G and renewable energy projects.
In fact, private investment has fallen over the past 10 years, and there is now a US$15trn investment gap out to 2040, according to the G20 Global Infrastructure Hub. This comes at a time when the IMF has called on rich nations to boost public spending on infrastructure to support economic recovery, encouraging further investment from the private sector.
What has caused this change in perception?
Firstly, there is the need for a return. Like a drop of water in the desert, infrastructure offers the prospect of relatively high performance when yields from fixed-income securities are low.
Over the past 10 years, the EDHECinfra index of unlisted infrastructure securities returned 14.6 percent per annum. While returns vary significantly from one fund to another and depend on the type of infrastructure invested in, this gives a sense of the potential level of outperformance.
Secondly, as it becomes harder to generate alpha in public equities and bonds, so investors are turning to private markets, such as private equity, credit, and infrastructure.
They are increasingly willing to take the business or development risk associated with building or improving an infrastructure asset. With core assets that offer the greatest resilience to economic downturns in high demand, there is a trend towards accepting these additional risks.
Growing interest
Without a doubt, there is increasing momentum for infrastructure to grow rapidly as an asset class. Institutional investors certainly are exploring possibilities. More than half (56 percent) of those recently surveyed by Preqin expect to increase their allocations over five years, with just 7 percent expecting to lower allocations.1
Notably, there is a huge need for the development of sustainable infrastructure, that is less carbon-intensive, which will bring investment opportunities. Assets include renewable power, green transport, sustainable water and waste, and green buildings. The Indian government has stressed the need to move towards sustainable infrastructure growth and developments are very encouraging. As per data from Refinitiv Infrastructure360 app, 58 out of 112 new Indian projects announced in 2021 are classified as renewable, and overall, 555 out of 2155 active projects fall under that category.
Looking forward, it seems that once again infrastructure investment will become a more popular asset class and infrastructure assets from wind farms to 5G to green buildings are likely to be major drivers of economic growth in the years to come.