Infrastructure is becoming an increasingly popular option for U.S. investors. Annual returns on the equity that companies have invested in their asset base generally range from 8-10% all the way up into the high teens for more economically sensitive “user pays” options. With relatively low earnings volatility and built-in inflation management, Infrastructure can provide reasonably secure returns and income to investors — particularly retirees — who crave them.
Most think infrastructure is just transportation, water and energy-related projects. There are many more opportunities out there.
Over the next 20 years, the World Bank estimates a global need of $40-$50 trillion worth of infrastructure investment. About half of that is in developed markets, the other half in emerging markets.
The majority of the infrastructure investment in the developed markets is about refurbishing existing infrastructure. In the U.S., it is unlikely to be funded entirely by governments — certainly the Trump administration and a Republican-controlled Congress are looking to leverage private sector interest. Infrastructure has been a big topic in Washington for a long time. “This is the year…” many say as the calendar turns “… P3s – public-private partnerships – will lead the way and the great infrastructure refurbishment shall begin.”
That flood of new investment has not happened, again, despite solid support at every level of government: federal, state and local. All are financially stretched, barely balancing budgets or running up large deficits. P3s are gaining acceptance; projects are getting done at the state level, but it is barely a trickle.
In the U.S., water systems lose 10,000 Olympic-size swimming pools of water every day through leakage, burst lines and other problems — in arguably the world’s most developed nation. A large amount of money will have to be spent to fix these problems; they won’t just disappear. Investors will happily put money to work, if they can be assured of reasonable long-term returns.
As for the benefits to investors, infrastructure assets tend to be monopolistic, long-duration assets that provide investors with predictable cash flows. This stems from their regulatory and/or contractual frameworks, which often provide investors with low earnings volatility and inflation protection.
The U.S. tax reform bill includes proposals to cut the tax efficiency of municipal bonds. Two things likely will happen after the bill’s passage: Municipal bonds will no longer be the cornerstone to financing infrastructure, and the private debt market will have to increase substantially to make up the difference. That could be good for the future of infrastructure shifting some of the burden from the taxpayer to the users of the new infrastructure.
So how could retail investors take advantage of this opportunity? Many infrastructure products are now available on U.S. markets, including classic retail mutual funds and exchange traded funds (ETFs). In the listed equity market, where we invest, we follow a little more than 200 companies globally. That’s $2 trillion of equity market capitalization, about $4 trillion worth of assets. It’s a big, deep, liquid market. Most of these investments are in mature operating companies.
On the equity side, there are also tax-advantaged vehicles with some infrastructure companies pushing into the listed real estate investment trust (REIT) space, including wireless tower companies. Many midstream pipeline companies can also be accessed through listed master limited partnership (MLP) structures.
In addition, and from a private equity perspective, syndicates of large pension funds and sovereign wealth funds are joining together and making direct bids or private market bids, attaching themselves to an operating company. For high-net-worth investors, private-equity style global infrastructure partners are also doing closed-end and open-ended structures. Depending on how unlisted funds are structured, between $150 billion and $300 billion of capital has yet to be drawn down in the private-equity style funds.
Yet what many investors do not realize is there are different ways to approach infrastructure investing. Americans tend to focus only on the “design, build and finance” phases (which carry the largest risk), completely overlooking the “maintain and operate” phases (where investors can benefit from the characteristics of infra-investing). The value of these projects does not end when construction does. As they mature, many provide excellent vehicles for income, growth, inflation protection and portfolio diversification.
The money is there, and waiting. It’s only a matter of time until it is put to use.