Investment characteristics

Chart displays: 1 Defensive investments with attractive risk-adjusted returns, 2 Low correlation with traditional investments, 3 Relatively high and predictable cash yields, 4 Inflation hedge

1. Defensive investments, attractive risk-adjusted returns

The high barriers to entry and the monopoly-like characteristics of many infrastructure assets mean that their financial performance is not as sensitive to the economic cycle as many other asset classes.
Investments are generally low risk given the stable and growing demand for the essential services provided and the regulation of the businesses, or long-term contractual protection of revenues.

2. Low correlation with traditional investments

Infrastructure investment returns generally have a relatively low correlation with those from traditional investments, as a result of different underlying business drivers.
Some business drivers are more closely related to GDP growth (e.g. ports), while others are more closely related to population growth (e.g. water utilities). Thus there are differing levels of correlation with traditional equities within the broad infrastructure investment universe.

3. Relatively high and predictable cash yields

Predictability of cash flows and low levels of risk enable efficient financing at the investee company level to maximize equity returns.
The high cash yield is generally offset by low or limited organic growth opportunities, although certain sectors and assets, especially if they involve greenfield projects or additional investments, can offer significant growth potential.

4. Inherent inflation hedge

Revenues are often hedged or partly hedged against the impact of inflation, either through an inflation element incorporated in the price/revenue formula of the contract, or through the pricing power of the business based on the essential nature of the services provided.

Risks

Infrastructure assets are generally viewed as being low risk but listed below are some of the most significant risks that may arise:

Patronage/demand risk: Some assets are exposed to usage or patronage risks. Usage risk varies between assets and over time.

Regulatory risk: Infrastructure assets are very often regulated by government either through a regime set by a regulator or through long-term concession agreements. The independence and consistency over time of the regulatory system is a key risk factor for investors.

Contractual/credit risk: Long-term contracts expose counterparties to credit or offtake risks.

Operational/construction risk: Infrastructure assets involve operational risks and greenfield projects involve construction risks.

Financing/inflation risk: The high leverage used in financing infrastructure assets exposes investors to the cost of debt and refinancing risk. Also, the value of cash flows may be impacted by inflation.