In a rapidly changing world, governments are coming under increasing pressure to invest in the infrastructure of their countries, and their cities in particular, to help them become more efficient, interconnected, and resilient to the challenges we face now and in the future.
However, many governments are facing very real budget constraints, leading to a widening gap between available public funding and required investment. This funding discrepancy provides an opportunity for private investors. In the ‘How to Invest in Infrastructure’ guide below, we present an overview of the sector, its key characteristics, segments, and driving forces, as well as potential investment entry points.
Why consider infrastructure investments?
1. They are more resilient during economic uncertainty
Infrastructure businesses and assets deliver essential services, tend to benefit from strong market positioning, and often face limited competition.
2. A partial hedge against inflation and a diversification opportunity
Infrastructure investments can be a partial hedge against inflation as some may have inflation indexed revenue streams, positioning them well to maintain value when prices are rising. They also offer an interesting diversification opportunity, combining certain attributes of equities, which can offer growth potential, and bonds, which tend to offer more income stability.
3. An appealing opportunity to benefit from structural trends
For some investors the infrastructure sector may offer an appealing opportunity to benefit from structural trends such as decarbonisation, urbanisation, and digital connectivity that are reshaping how society lives and works.
How to invest in infrastructure
There are two options to add infrastructure assets to your portfolio, and the suitability of each option will depend on factors such as experience, investment horizon, industry knowledge, and tolerance for risk.
Public markets
As a first-time investor in the infrastructure sector, you may want to consider public markets as the first stop on your investment journey. Public markets offer investment vehicles such as infrastructure mutual funds and ETFs, and infrastructure and municipal bonds, as well as shares to buy in publicly traded companies. And there are certain advantages to this approach: a low minimum amount of initial capital is needed, and the securities are easily sellable.
With that said, listed instruments are highly susceptible to rapid sentiment swings, impacting prices and valuations. And as an indirect investor, your ability to exert influence over the operations of the businesses will be limited.
Private markets
Sophisticated and patient investors can also invest in non-listed infrastructure. Since assessing this type of opportunity requires time, resources, and expertise, and often significant capital, investors usually pool capital in private infrastructure funds managed by experts.
It should be noted that private markets are also vulnerable to changes in the economic backdrop that may affect the profitability of the underlying assets, and thus the pricing of the shares. The key difference lies in price discovery. While public markets reflect changing conditions rapidly through transparent and continuous trading, private markets lack such immediate pricing mechanisms, resulting in delayed or less frequent valuation adjustments. Private infrastructure investing also entails reduced liquidity compared to public market equivalents. Unlike publicly traded stocks or bonds, which can usually be bought or sold on short notice, private infrastructure assets are long-term commitments with limited opportunities for early exit.
Investors must therefore be prepared to lock up capital for extended periods, often without the ability to access funds until the project reaches maturity or is refinanced. On average it takes seven to eight years to execute private infrastructure investments, but some projects can span more than a decade. This long-term commitment underscores the importance of careful due diligence and alignment with investment goals. As a result, private infrastructure investing requires significant time and financial commitment.
Conclusion: Infrastructure is evolving
No longer limited to roads and utilities, infrastructure is now at the forefront of powerful trends shaping our world: digitalisation, clean energy, and urbanisation. The sector offers you the potential of a long-term, stable income, a buffer against economic shocks, and some protection against inflation. In uncertain times, this makes it an attractive option for portfolio diversification.