He adds: “These are more exposed to growth than regulated assets, as their revenues are typically linked to economic or population growth.”
Competitive market assets – these operate in markets with exposure to wholesale prices, and typically without the security of regulation or concession contracts. For example, it could be the companies that create and sell energy to the end user, rather than a manager of an energy network.
According to Mr Langley: “We focus on investing in the regulated assets and user pay assets, because the companies either operate within a defined regulatory framework, or with long-term contracts in place that underpin the return profiles of these companies.”
Therefore, assets within the fund would include regulated gas, water and electricity companies in the regulated assets space, and toll roads, rail, port and airport companies in the user pay space.
What’s different about them?
Infrastructure investment is different from mainstream equity investment in that it will have a very close correlation with gross domestic product growth, and tends to be more exposed to economic indicators such as population growth.
It is also different to fixed income in that it potentially offers a higher yield without being subject to the same kind of pressures that affect fixed income.
Collins Roth, managing director at MPC Industrial Projects, describes the difference thus: “A pure infrastructure investment should be closely correlated to GDP, with a high degree of exposure to government (local or national) credit quality, GDP growth, and population growth.
“It is these factors which attract investors into the sector, often ‘pulling’ them from lower-return government debt products and sometimes real estate, which has some of the same underlying attributes, but a greater degree of asset selection and market list.”
Mr Roth adds there could be market risk with some infrastructure projects, such as toll roads, which could have greater market risk depending on availability payments, over free-to-travel roads and other transportation options, such as public transport.
How they compare with other asset classes
For Mr Langley, infrastructure stocks can have more attractive risk and reward profiles to other equity asset classes.
He explains: “Being listed, infrastructure stocks can trade with market sentiment in the short-term, although over the longer-term, the companies should trade in line with their fundamentals.
“Infrastructure companies have delivered a reasonable share of rising markets. However, in times of economic stress the essential nature of infrastructure becomes attractive, and infrastructure has traditionally held up better in downturns than traditional equity indices.”
As a result, he believes this can help add stability to an overall portfolio.
There is also a difference between listed and unlisted infrastructure investments in terms of valuations and pricing, according to Mar Beltran, senior director and infrastructure sector lead for Europe, Middle East and Africa in the infrastructure ratings division of S&P Global Ratings.
