The asset class is now a real success with long-term investors but is still unknown or misunderstood by many.
Why is it important to show interest?
First, the correlation with the economic cycle is much weaker than with classical shares. The needs are huge (€ 3,690 billion by 2030, OECD source) and the states are making drastic budget cuts. Private investors are therefore automatically called upon to finance such projects more and more.
The cash flows generated are large (we generally expect between 10% and 12% IRR on the asset class, a multiple of 2 and a 5% to 6% distribution in the life of the funds) and predictable given the nature of the businesses (energy distribution and storage, transport, communications, hospitals …).
Perfect fit with long-term liabilities, taking into account the lifetime of an infrastructure fund, often 10 years including 3 years of investment period.
The cash-on-cash, which is the period between which the money is called by the company and the date it is returned before capital gains, is lower, around 5/6 years.
The volatility of returns is very low and the risk of a decline limited on mature assets and less subject to state intervention.
Finally, an important advantage is that real yields are correlated with inflation, as the operating contracts are indexed, creating a natural hedge.
How do you tame the asset class?
Having a specific and relatively new vocabulary, the typology may, at first look, discourage investors. Yet understanding is simple enough for anyone interested in it.
First of all, to be qualified as infrastructure, an asset must meet 4 major criteria: being an essential service with high barriers at first, having a solid business model and protection downward, generating predictable cash flows and indexed to inflation.
Then there are three types of infrastructures: greenfield (assets not built, the risk is higher because the asset is not operational), brownfield (operational assets but not fully optimized, possibilities for managers to work on it), secondary stage (a fully optimized asset that generates virtually nothing more than returns through the coupon dividend effect).
Finally, it is possible to invest through Core / Core Plus / Value Added funds, each type having different risk /liquidity profiles and adapted to different categories of investors.
How to consider an investment?
The main questions to ask are:
- What level of returns do I expect from the asset class?
- What is the maturity and size of the fund?
- How do I want to position myself geographically?
- Do I prefer secondary or primary?
- Am I willing to accept the greenfield and in what proportion?
What are the pitfalls to avoid?
Once these issues are resolved, there are many risks of making mistakes.
That’s why we have put a proprietary selection process to accompany our customers in product selection and in the introduction of the right strategy in their portfolio.
The most important pitfalls are:
- How to source funds which are raising money: we have access to all market databases and are identified by asset managers as an important player in the sector.
- understanding the strategy: we have a proprietary Due Diligence process, which has evolved over time and takes into account our asset class expertise, which cannot be treated as a classical asset.
The accessibility of managers: we go onsite during our due diligence and meet both investment teams and asset management once investment has taken place.
We have been supporting our clients in their infrastructure investments for 5 years and have invested several tens of millions of euros in the asset class. We have a real know-how in the analysis of funds, in building a portfolio from zero exposure as well as sourcing ideas and simplifying the asset class for directors / decision-makers.