In most election years, the promise of new roads and transport systems is high on the agenda, with 2016 being no different. Whether it is high-speed trains, wider internet bandwidths or ways to reduce peak hour congestion, political talk about investment into much needed infrastructure gets thrown around like the proverbial football. Waiting for politicians to figure out how best to spend the public's money can be painful, so luckily they are not the only means whereby roads and airports can be built.
Private infrastructure investment and combined private/public projects make up a large portion of the infrastructure asset pool. As of the end of March 2016 there were 9 infrastructure funds listed on the ASX with a combined market value of about $65 billion. Listed funds are one of the main vehicles for financing and managing infrastructure assets and the only real way in which "mum and dad" investors can get access to these types of investments.
Generally speaking, infrastructure projects and assets require significant sums of money upfront and during the construction phase, following which they are likely to provide a steady and reliable revenue. As such, it is not possible for smaller investors to gain direct access to infrastructure investments. Most private projects are funded by large infrastructure companies or by investment funds. Due to the need to secure funding, most of these funds are listed and financed through shareholder capital raisings.
There are a number of key infrastructure sectors, each of which offer their own risk/return profile:
- Toll roads - stable revenues with linkages to business cycle risks
- Airports - various sources of revenue with greater sensitivity to the broader economy
- Telecoms (transmission) - stable revenues through regulated pricing but risks from competition and technological changes
- Oil and gas (pipelines) - generally fixed life in line with production lifetime
- Electricity (transmission and distribution) - stable revenues through regulated pricing
- Water - stable revenues through regulated pricing
The lower risk end of the spectrum includes water, electricity and long-life pipelines. These generally have revenues and expenses that are easily forecasted and hence can be valued with relatively high certainty. At the other end of the scale are projects that are maybe highly sensitive to the economy or a dependent industry (e.g. US shale pipelines). Another major factor which can determine the level of risk within an infrastructure asset is the level of debt used to finance construction and operations.
Most investors fit infrastructure into the defensive end of their portfolio. With a steady income yield, which is likely to grow with inflation, this type of investment is welcome in most portfolios. Many even consider infrastructure to be comparable to bonds, as both can produce a reliable and ongoing source of income. However, as with any investment, it is important to look under the hood to really determine the drivers of revenue and growth. And of course, understanding what price to pay for earnings is a critical part of any investment decision.
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