News and analysis from Standard & Poor’s MarketScope Advisor
Before the credit crisis hit markets with hurricane force in 2008 and 2009, Wall Street was becoming increasingly enamored with an investment trend that, through the miracle of financial technology, promised investors access to a new and distinct asset class capable of generating strong returns at relatively low risk.
This new asset class was infrastructure–income-generating enterprises such as airports or toll roads–that had historically been municipally owned and funded by government-issued debt. Using a concept developed in Europe and known as the “public-private partnership,” infrastructure assets began to open to private investment. Investors would fund badly needed improvements to these and other public infrastructure assets, such as bridges, hospitals, and university dormitories, in exchange for the right to collect a steady stream of payments that would repay the initial investment as well as provide them with an attractive return.
The idea that this concept could open a vast new world of investable assets with highly dependable revenue streams–together with a steady stream of economic studies declaring that global infrastructure was crumbling and needed trillions of dollars of new investment or economic growth would begin to slow–set off a rush among portfolio managers to create infrastructure investment funds. These funds proved highly attractive to pension funds and institutional investors seeking to lock in long-term rates of return. Inflows to infrastructure funds rose from just $2.4 billion in 2004 to a massive $34.3 billion in 2007, according to data from Probitas Partners, a private equity consultant.
The money flowing to these private infrastructure funds did not go unnoticed by mutual fund sponsors, and they soon responded with funds of their own. Prior to 2007 there were no funds specifically targeting infrastructure, while today there are more than a dozen. Some companies took their lackluster utility funds, rejiggered their portfolios slightly, and renamed them infrastructure funds.
Since that time, however, the credit crisis exposed a previously unappreciated weakness of infrastructure funds: their assets are anything but liquid. With credit concerns now paramount and the financial health of every enterprise in doubt, these funds have lost some of their earlier popularity. The money flowing into infrastructure funds dropped to $10.7 billion in 2009, and Probitas says it is not expected to rebound much in 2010.
Still, there are some reasons for optimism. Most infrastructure funds have rebounded strongly over the past year, and at least one fund manager believes the time is right for a new fund, even though several existing infrastructure mutual funds are languishing with less than $10 million in assets. T. Rowe Price began selling shares in its Global Infrastructure Fund (TRGFX) in February 2010, and collected more than $20 million in assets since then.