Infrastructure is an asset class that can serve as a powerful addition to many investment portfolios and it continues to gain greater acceptance from institutional investors. Against this, it is often oversimplified and/or poorly understood by institutional investors at the expense of effective portfolio construction.
Infrastructure offers the potential to add diversification to a portfolio. A well-managed infrastructure program can deliver exposure to assets that in most circumstances are lowly correlated with traditional asset classes.
Infrastructure assets are distinct from others in private markets as a consequence of their risk profile. The size of an allocation within an overall portfolio is often constrained first and foremost by portfolio liquidity requirements in combination with any preferences to invest in other illiquid assets also. Investors have many ways to gain access to these assets, and the appropriate modes for doing so vary with individual investor circumstances. Specialist knowledge of infrastructure assets and investment modes is important to building a successful portfolio, beginning with a detailed plan for portfolio development before individual investments are contemplated. Portfolio diversification, in a variety of respects, and initial due diligence by experienced analysts are key mitigants of investment risk associated with infrastructure, as in other parts of private markets.
This house view aims to define the types of assets that represent infrastructure and discusses how to invest in the asset class effectively. To be a successful long-term investor in unlisted infrastructure (the primary focus of this paper) requires an appreciation of the range of alternatives across the asset class, detailed upfront due diligence of investments made and effective portfolio diversification. At the same time, there are many ways to invest, including options for overcoming the governance burden that building a direct-fund program can pose, and investors should consider their own circumstances and preferences before deciding how to proceed. Topics covered include:
- An Investment perspective on revenue structures and risk drivers, and valuation trends
- Environmental, social and governance concerns
- The mechanics of infrastructure investing
- The optimal use of infrastructure