Whether a country is categorized as “emerging” or it is a fully developed and sophisticated country, such as Japan, the US, Australia or Western Europe, infrastructure is vital to a country’s economic and social development. Infrastructure is the backbone of a country that provides the most basic of necessities such as water, energy and waste management, followed by other additional services such as transportation and communication. These fundamental infrastructure assets are also supplemented by ancillary social assets including facilities for healthcare, education and community services. As the global population continues to grow and every country continues along its own evolutionary path, there is no denying the increasing need and demand for infrastructure to support human activity.
In the context of the private markets, infrastructure has also matured over the past ten to fifteen years to become its own asset class much like venture capital, buyout and private debt. For investors, the appeal of infrastructure investing is due to a number of characteristics unique to infrastructure, including its relatively higher resilience to economic cycles (e.g. people will always need energy and water, regardless of how the economy is performing). This strategy also comes with the benefit of investing in relatively lower risk, tangible assets that continuously generate steady yield, which then provides for a more attractive liquidity profile compared to traditional private equity investment strategies, such as venture capital, growth equity and buyout. In a portfolio context, these attributes of infrastructure investments can provide important risk mitigation and hedge against other relatively riskier private markets strategies.
Despite the advantages of infrastructure investments, this strategy also has its own unique set of complexities. In this article, we will explore the basics of infrastructure and take a closer look at the infrastructure markets in North America and Europe, followed by a deeper dive into historical returns across economic cycles and during periods of market disruption to better understand its investment behavior which will help to guide capital allocations and investment decisions.