In a market characterized by volatility and inflation, infrastructure debt assets are increasingly attractive for investors because of the defensive characteristics they offer.
The asset class is less intrinsically linked to market volatility than others. Assets provide hard collateral with contracted cash flows and built in inflation protection. Even in a recession these assets often continue to generate income for investors.
“The primary attraction of infrastructure from an investment content point of view is that it is an equity investment in an asset class that is fundamentally less correlated to GDP,” said Fentress Boyse, senior investment leader at Partners Group.
Speaking during a panel on how to build portfolio resilience he added that the stabilizing nature of the asset class is necessary in both good and bad economic environments.
Private infrastructure offers attractive returns and provides diversification.
A Goldman Sachs report released in October found that sentiment in the asset class is growing, driven by strong performance during times of high inflation and long-term exposure opportunities. The report also found that 93 percent of LPs expect infrastructure related opportunities to be consistent or better in the year ahead.
“You see assets with a very, very high percentage of either direct or indirect inflation linkages,” said Boyse. “They either have contractual, automatic price adjustments to isolate investors from changes in inflation or assets that can anticipate an even lower interest rate environment and mitigate around it.”
These assets have a long useful life and high capital intensity. “It costs a lot of money to develop a power plant, you're not going to do that without an agreement from someone to buy the power from you,” he said.
“The toll roads from today are not the toll roads from 20 years ago,” said Boyse. “The opportunity set is investments in physical assets that have clear value and a clear purpose to enable a society's daily functioning.”
And as II reported earlier this month, there is also a great opportunity for investors to provide much needed private capital for development instead of public funding, which is wholly insufficient to finance the great need for infrastructure in the U.S. and globally.
