Unlisted infrastructure continues to gain recognition as a distinctive asset class and holds considerable appeal for investors, including pension funds and life assurance companies focused on yield and seeking to match their long-term liabilities.
Globally, demand for private infrastructure capital continues to grow, driven by governmental budget constraints, the need for investment to facilitate continued economic growth, and a secondary market for existing assets, which continues to increase in importance. As regulatory changes may cause banks to retrench, investors have also begun looking increasingly at the provision of private infrastructure debt.
Investing in unlisted infrastructure offers attractive benefits, including the possibility to own and actively manage real assets with a diversified end-user base and high barriers to entry, as well as performance characteristics that are potentially resilient to the economic cycle. Infrastructure offers relatively low long-term cash flow volatility compared with other asset classes and can also provide attractive, inflation-hedged total returns.*
*No assurance can be made that an investment in infrastructure will achieve its stated objectives.
Investing in infrastructure however is not risk free; it requires strategic asset allocation decisions, a detailed understanding of jurisdictions and regulation, as well as specific asset management skills to mitigate risks and support investment returns.
Unlisted infrastructure investment has the potential to offer diversification benefits for multi-asset investors due to the lower correlation of performance with other major asset classes. It is also capable of delivering attractive risk-adjusted returns, due to relatively lower volatility and strong returns, particularly in the medium and long term.
Mature infrastructure provides stable, long-term, income-oriented returns, while growth and development infrastructure offer material capital appreciation potential. Returns across all lifecycles can potentially be enhanced with active asset management by an experienced infrastructure manager.
2. Infrastructure as an Asset Class - Key asset class benefits
A real asset class: Infrastructure represents a tangible asset – i.e. a combination of land and structures that constitutes real property – but is not necessarily a commodity in the same sense as real estate. Real property will almost always retain a residual value, which is particularly attractive during periods of distress.
Essential services resilient to the economic cycle: User demand patterns for infrastructure assets tend to be relatively inelastic given the essential nature of these services. Therefore, they tend to exhibit a lower correlation to the economic cycle compared with other sectors. In addition, some assets, such as electricity and gas distribution networks, can be regulated, which can lead to an increase in return predictability. Depending on the regulation, assets can be volume neutral, offering returns that are independent of volumes and demand fluctuations.
The economic cycle can have more impact on unregulated services, such as airports and seaports, though the essential nature of such services mitigates this risk. As a general rule, when looking at different infrastructure asset types, it could be stated that the stronger and more predictable the regulation and contractual framework is for a certain asset, the lower its sensitivity to the economic context and the more stable its cash flows over the long term. During economic and market volatility, this defensive characteristic has been an attractive feature of the asset class.
Diversified end-user base: The counterparties to infrastructure assets are generally a widely diversified group of end users, which helps to stabilise cash flows. Often the customer base includes governments and local authorities, which tend to be more creditworthy than most private counterparties.
High barriers to entry: Infrastructure requires a high level of initial capital investment and this acts as a significant impediment to potential competitors entering the market. Assets can enjoy monopolistic or quasi-monopolistic market positioning and it would be economically unsound, or legally not possible, to build a competing facility. Examples of natural monopolies include water infrastructure, as well as gas and electricity grids, which is why such assets are almost always regulated.
Long-term cash flow predictability: Regulation provides long-term revenue visibility to infrastructure investments. Additionally, ownership of regulated infrastructure is usually transferred to private investors through long-term concession agreements that can range up to 99 years. Concession agreements give the right to operate a business for a given amount of time and under certain conditions. If the concession involves a monopolistic business, for example a gas distribution network, then the revenues will often be regulated in the long term. The long-term nature of concession agreements represents an advantage for asset managers and enables them to put in place long-term strategies to maximise asset values, including, for example, the optimization of operations capital expenditures and long-term financing. In the case of unregulated assets, the depreciable operating life of wellmaintained infrastructure assets tends to be long and predictable.
Inflation hedge: Depending on the type of infrastructure asset, price inflation can sometimes be passed on to the end consumer. Most regulatory frameworks allow regulated assets to use inflation-indexed user tariffs, often associated with electricity transmission and distribution or gas distribution. However, inflation-indexed toll increases can be common features of concessions for some types of surface transport such as roads, bridges, and tunnels. For unregulated assets, full hedging may not always be possible.
Active management opportunities: Infrastructure provides managers with an active and strategic opportunity to add value directly to an investment with the objective of increasing returns. This type of value enhancement is typically most feasible in the case of unlisted investments. Applied effectively, active asset management can, amongst other things, help boost user volumes and revenues, cut costs and optimize capital structures and cash flow, enhancing returns over and above the cost of active management. The ability to create value successfully will be dependent in part upon the specialist skills of the asset management team, but also, for example, upon the level of regulation of an asset, whereby higher regulatory protection might reduce the level of operational flexibility given to asset managers.
3. Investment Opportunity - EPICO II Infrastructure Fund
Euro 300m, 12 year investment with 9-11% net IRR
Benelux platform investing in European infrastructure
Diversified and balanced portfolio of European greenfield and operational infrastructure assets
Paris aligned infrastructure enjoying strong policy support such as Energy Transition, Digital Transformation and Sustainable Mobility and Transport
Sectors: Offshore Wind, Battery storage, Datacenters, Industrial water treatment, School infrastructure PPPs, Social infrastructure PPPs, Road PPPs, Port terminal - waste & recycling, Port terminal - fruit & fresh
Responsible investment and active asset management
European focus, with approx. 50% Benelux
Long-term public and private sector relationships
Early stage visibility and access
Early mover advantage Off-market transactions
Term: 12 years with extension option of 2 x 2 years; commitment period: 5 years with extension option of 1 year
Management Fee: 1.5% on committed capital during investment period; and 1.5 % on invested capital thereafter
Carried Interest: 20% over hurdle-rate of 7%; half catch-up
Co-investment: open to a limited number of investors; at the discretion of the Fund Manager, based a.o. on investment threshold size
Type: An actively managed closed-end fund, domiciled in Belgium
Fund Manager: PMV Fund Management NV
PMV commitment: up to EUR 30 million