Of the thematic investment trends out there, infrastructure development is a big one.
To start, President Joe Biden wants his legacy to be defined by a rebuilding of American infrastructure. His $1,2 trillion infrastructure bill will see US roads, water pipes, broadband internet, and public works systems upgraded. The scale of that spending will be a boon for the kaleidoscope of businesses involved.
The pandemic is also providing strong impetus for global infrastructure spending – governments see it as a relatively uncontentious way to jumpstart their sagging economies.
Spending on infrastructure is also necessary for countries to remain relevant and competitive. As the world moves to address climate change, the economies that continue to use ‘dirty’ energy may find themselves shunned by increasingly carbon-conscious businesses and consumers. The transition to clean energy requires massive sustainable infrastructure development.
These forces create an opportunity for businesses to design, build, operate, and maintain infrastructure assets. The purpose of the piece is to explore the resulting investment opportunity for individual investors, particularly in light of the Regulation 28 framework being updated to allow for a 45% allocation to infrastructure assets in South Africa.
What does it mean to invest in infrastructure?
Infrastructure is often touted as a new asset class when, really, it’s not. If you’ve owned MTN or Vodacom shares, you’ve had exposure to an operator of telecommunications infrastructure. Similarly, investments in any of the construction companies (Aveng, Group Five, Afrimat, etc.) would have given you exposure to infrastructure developers.
What has changed is that would-be infrastructure investors now have a much bigger opportunity set, making this alternative asset class suitable to a broader spectrum of individuals. There are four conduits through which you as an investor can get exposure to infrastructure:
The most suitable vehicle will depend on several factors including the amount you have to invest, your liquidity needs, your risk tolerance, and your experience of investing in infrastructure. Your portfolio manager, wealth manager, or financial adviser can help you assess the options.
But whichever strategy you pick, it’s critical to understand where the underlying infrastructure company or fund sits in the value chain. In general, there are three different stages to any infrastructure project:
When investing in an infrastructure company, it’s likely that they’ll operate in one of the above stages because each requires a nuanced skillset. On the other hand, an infrastructure fund may have exposure to a mix of projects or companies that straddle the different stages.
What are the benefits of investing in infrastructure?
It’s not just the fundamental demand for infrastructure that makes the thematic investment case interesting. The associated risk/return characteristics are downright seductive to 21st century investors scarred by monumental volatility. The generally accepted benefits of investing in infrastructure are as follows:
Infrastructure assets with the above characteristics are likely to produce stable returns through the cycle, making them great for portfolio diversification. This characteristic will become increasingly valuable as investors seek steady returns to combat rising volatility and the anxiety it brings.
In addition, investing in infrastructure has the potential to create positive environmental and socioeconomic impact, something that many investors now believe their investments should achieve alongside the generation of attractive returns.
If I am to leave you with two points from this piece it would be that 1) the global demand for infrastructure looks solid and long-term in nature, but 2) it’s a heterogenous asset class in which the underlying companies and funds will have very different characteristics and risk/return profiles. In other words, the opportunity is real, but the right knowledge and research is required to make the most of it.