Infrastructure funds invest in public assets and services that are essential for a functioning society, such as power, transport, water and waste. The funds benefit from consistent, long-term returns, low volatility and low correlation to the wider market, making them an attractive addition to a private equity portfolio.
Many private equity funds have some exposure to infrastructure, to take advantage of their characteristics of low-volatility, low-correlation and long-term returns. An infrastructure fund is simply a form of sector-specialised private equity fund that only invests in infrastructure - in much the same way as a venture capital fund might only invest in technology.
Infrastructure has typically been a governmental responsibility - especially in sectors like transport, water. Increasingly, as public finances have been stretched, Public Private Partnerships (PPP) have sprung up to close the gap in funding. The private sector is also known to offer a lot in improving productivity and performance, allowing private companies to take on large projects - and for infrastructure funds to invest in these companies.
The other form of investment is in pure-private infrastructure companies, regulated but without government involvement. This could be large energy or telecom investments within heavily-regulated industries, taking on a private equity approach to tackling infrastructure.
Absolute return and inflation protection. As most infrastructure assets provide essential services to a population, they have some form of link to inflation in the form of contract clauses or regulatory pass-through mechanisms. Plus - since the assets themselves have intrinsic value which rises with inflation - investments can be measured on an absolute return basis.
Low correlation. Infrastructure cash flows are generally less correlated to other asset classes in a standard portfolio - whether public equity and debt or private equity. This means that adding it to a portfolio can have diversification benefits and lower overall portfolio risk.
Resilient. Infrastructure revenue is usually tied to the regulatory environment and long term contracts - often 20 years or more. This provides visibility and resilience when it comes to the future performance of an investment and makes them less volatile to market cycles.
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