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.