Infrastructure as an Asset Class

Infrastructure:  noun – the basic physical and organizational structures and facilities (e.g., buildings, roads, and power supplies) needed for the operation of a society or enterprise.

How many times have you heard your financial advisor tell you about asset allocation, rebalancing, diversification, correlations, volatility, risk management, yield and how they will help you achieve your goal for providing an income stream throughout your retirement. Too often investors throw money around like scattering seed, saying to themselves, “I’ll throw a little here and little there to see what happens.”

Instead, Warren Buffett advocates a policy of finding the best and richest soil, planting substantial amount of seed in it, and protecting it. Warren Buffett has often said, “I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches – representing all the investments that you got to make in a lifetime.

If you could only make 20 investments in your lifetime what would you look for?

For long-term investors who are looking for stable cash flows, returns uncorrelated with other asset classes, protection from inflation, and an asset that transcends generations, investing in infrastructure is ideal. Simply stated, these investors are in for the    long haul, which is the advantage for infrastructure investing.

Infrastructure assets uniquely combine the following characteristics:

  • low price elasticity of demand, therefore low correlation with the business cycle
  • predictable and substantial free cash flow
  • attractive risk-adjusted cash yield, available over long periods
  • improved diversification
  • better liability hedging
  • valuation that depends on fundamentals, not the stock market

Infrastructure assets are increasingly attracting attention from institutional investors and accredited investors alike, seeking their benefits of consistent income yield, greater capital stability and inflation protection attributes. These assets are often built or regulated in such a way that they face little or no competition. They often have their profits guaranteed by long-term contracts or regulation and returns tend to be relatively predictable over time regardless of the economic or business cycle. For investors, this provides excellent visibility for revenues, cash-flows and ultimately, dividends. This is the ultimate goal of asset allocation models for most investors; long term, stable, predictable income streams that protect wealth and purchasing power over a long term time horizon. Wise investors consider how they will fund their “future liabilities” (i.e., their living costs) over the long term.  Infrastructure investments are one tool that can “match” those liabilities with an asset, thereby covering those future expenses.

– Erik S Melang, Senior Managing Director, Clean Energy Advisors