Infrastructure Investments (2024)

FAQs

What are infrastructure investments? ›

Infrastructure investing provides financing to build, purchase or upgrade tangible assets that provide essential services in two key categories: 1) Economic assets such as airports, power plants and cell towers, and 2) Social assets such as hospitals, schools and parks.

U.S. Jobs and Imports

The main reason infrastructure investments create more jobs than an increase in household consumption is that the share of spending done within the U.S, as opposed to the purchase of imports, is significantly higher with infrastructure investments. Domestic spending and imports in manufacturing.

Infrastructure assets exhibit unique characteristics, such as the ability to generate reliable cash flow and provide inflation protection, lower risk of capital loss and low correlations with other asset classes. Infrastructure in a diversified portfolio can enhance returns and reduce portfolio risk.

An allocation to infrastructure may also enable investors to better position their portfolios as they navigate near-term volatility driven by macro factors, such as global geopolitical turmoil, elevated inflation and higher interest rates.

Infrastructure consists of the physical assets required for economies and societies to function, such as toll roads, bridges and railroads. Infrastructure investors provide the capital necessary to repair and build new infrastructure.

Infrastructure is composed of public and private physical structures such as roads, railways, bridges, tunnels, water supply, sewers, electrical grids, and telecommunications (including Internet connectivity and broadband access).

Infrastructure affects growth through several supply and demand-side channels. Investments in energy, telecommunications, and transport networks directly impact growth, as all types of infrastructure represent an essential input in any production of goods and services.

Investments in America's infrastructure have the potential to boost long-run productivity and deliver broad-based economic growth that reaches communities across America. Importantly, these investments also can advance climate resilience and reduce inflationary pressures.

The economy needs reliable infrastructure to connect supply chains and efficiently move goods and services across borders. Infrastructure connects households across metropolitan areas to higher quality opportunities for employment, healthcare and education.

Risks of Investing in Infrastructure

Although leverage is a common characteristic of infrastructure, it still poses a risk. High amounts of leverage result in high amounts of interest to be paid. If the revenue-generating abilities are enough to match the interest, then that would be a huge risk for the asset.

How do infrastructure investors make money? ›

At a high level, infrastructure private equity resembles any other type of private equity: firms raise capital from outside investors (Limited Partners) and then use that capital to invest in assets, operate them, and eventually sell them to earn a high return.

Academic research over the last four decades has provided strong evidence of the positive contribution of infrastructure investments towards development objectives, including output and productivity, poverty and inequality, labor market outcomes, human capital formation, and trade.

Historically, infrastructure assets have delivered a consistent income and a return premium relative to public equities and fixed income across various market cycles. Past performance is not indicative of future results.

However, investors should exercise prudence given the current high valuations. Infrastructure sector-based mutual funds have offered upto 87% returns in the last one year — with an average return of around 69.63%. Around 18 infrastructure funds have completed one year of operations in the market.

Net returns are generally considered to be between 7% and 10% for core infrastructure such as roads and power grids; core plus investments (car parks or data centres) are 10%-13% and higher-risk value-add investments start at 14%. Anything above 20% is “exceptional”, says a placement agent.

To begin with, infrastructure investment trust is planned to pool money from investors to invest it in assets generating cash flow. Moreover, they invest in projects like roadways, highways and other high-value infrastructural units.

The Top Infrastructure Private Equity Funds

You can divide infrastructure investors into a few main categories: actual private equity firms (“fund managers”), large banks, pension funds, sovereign wealth funds, and the investment arms of insurance companies.

Infrastructure assets typically have a low correlation with other asset classes, including listed equities, real estate and fixed income. The quality and predictability of their cash flows tend to provide for stable returns to shareholders over time.