Real Estate 3.10 Caia Ii Infrastructure As An Asset Class

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asset class

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category of investments that possess similar investment characteristics, systematic risk factors and regulatory burdens - theoretically the homogeneous nature of an asset class should result in investments that have substantial correlations

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Infrastructure as an asset class

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includes the physical equipment and services that are needed for a community or country

subsectors: econmic infrastrucutre and social infrastrucutre

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Economic infrastructure

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- utilities (water, energy generation, pipelines
- communication (telecom networks, satellites)
- transport (ports, railways)
- renewable energy

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social infrastructure

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- education facilities
- health care
- security /recreational facilities
- public housing

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economic characteristics of infrastructure

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- High barriers to entry (high fixed costs, regulation limiting)
- economies of scale (high fixed costs and low variable costs average cost per customer decreases as the number of customs increases)
- inelastic customer demand (less susceptible to market cycles necessities)
- high operating margins (low operating costs)
- long duration

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why invest in infrastructure

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- high risk-adjusted returns
- low correlation to market volatility
- low return correlation with other investments
- effective hedge against inflation
- sable cash flows
- low incidence of defaults
- asset-liablity matching (pension fund long-term liabilities)
- socially responsible investment

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Investment vehicles

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- Unlisted infrastructure investments (direct investments -> high illiquidity
- unlisted private infrastructure funds (a type of private equity) -> use a closed-ended structure
- listed infrastructure companies -> equity investment example utility
- listed public infrastructure funds -> structured open-ended or close-ended funds
- Infrastructure debt
- new investment vehicles

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market volume

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doubled its size in recent years and now accounts for 12% of all alternative investments

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classification method

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target allocation 1-10% unlisted infrastructure is to consider as separate asset class - or private equity real asset or alternative investment

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Risks and return

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greenfield investments yield 15-25% while low risk brownfield investments were expected to yield 6-12% - emerging market infrastructure is expected to exceed developed markets (19% vs. 12%)

less leverage

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Potential benchmarks

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- Absolute return benchmarks (10%)
- inflation plus a specified real return (inflation rate +5%)
- LIBOR plus a real return
- Peer group of similar unlisted infrastructure funds
- Listed infrastructure and global indices

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Investment risks

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- Project company risks (business risk / construction risks / financing risk / social political risk)
- Fund risks (valuation & illiquidity risk, corporate governance risk)
- Investors risks (copy risk, reinvestment & reputational risk)

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historical performance

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- Listed indices negatively skewed posses high level of kurtosis highly correlated with stock indices
- listed funds high levels of return dispersion
-investors experienced high volatility among different funds
- unlisted australian infrastructure had high sharpe ration only direct real estate was better

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investment properties

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- Diversification ability
- inflation protection
- cash flows
- portfolio benefits

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Diversification ability

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listed infrastructure fails to offer substantial diversification potential. unlisted infrastructure appears to have great diversification potential based on the relatively low and even negative correlations with other asset classes

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inflation protection

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infrastructure remains an uncertain inflation hedge due to mixed empirical evidence infrastructure investment with cash flows that rely on price levels appear to be suitable inflation hedges. U.S infrastructure companies offer a long-term inflation hedge J.P. Morgan asset mgmt

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Cash flow properties

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based on cash flow analysis infrastructure offers significant diversification potential stemming from its low correlation with other asset classes within subsecoter and across countries. the high level of dispersion regarding time to full investment amortization and distribution indicates yet again the heterogeneous nature

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optimal portolfio weight

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institutional portfolios, a small infrastructure allocation appears to reduce portfolio risk while also slightly improving returns. its difficult to determine the optimal weight - heterogeneity and limited history

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historical performance

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infrastructure funds have performed quite well compared to privet equity funds based on median IRR and standard deviation. Higher returns than private equity, real estate venture capital but lower returns than buyout and mezzanine fund. second loses risk only mezzanine funds were better