CAIA - 19 - Infrastructure as an Investment

Question 1

Infrastructure typically has the following characteristics:

1. ___, ___assets with a ___ ___;
2. Higher ___costs
3. Low ___costs
4. Supports ___.

Answer 1

Infrastructure typically has the following characteristics:

1. Large, physical assets with a long life;
2. Higher capital costs
3. Low operating costs
4. Supports society.

Question 2

There are 3 approaches to classifying infrastructure:

1. ___ party
2. ___of pricing
3. Role in ___

Answer 2

There are 3 approaches to classifying infrastructure:

1. Paying party
2. Regulation of pricing
3. Role in economy

Question 3

Unregulated pricing of infrastructure investments commonly occurs in the ___ sector.

Answer 3

Unregulated pricing of infrastructure investments commonly occurs in the energy sector.

Question 4

The 2 ways to classify assets based on their role in the economy is:

1. ___
2. ___

Answer 4

The 2 ways to classify assets based on their role in the economy is:

1. economic

2. social

Question 5

___ infrastructure assets are assets whose economic value is based on the revenue they produce.

Answer 5

Economic infrastructure assets are assets whose economic value is based on the revenue they produce.

Question 6

___ infrastructure assets provide a service and do not need to generate revenue.

Answer 6

Social infrastructure assets provide a service and do not need to generate revenue.

Question 7

Social infrastructure assets provided by the private sector are generally in the form of ___.

Answer 7

Social infrastructure assets provided by the private sector are generally in the form of PPPs.

Question 8

Infrastructure investments needed to help the global economy reach its potential are expected to be around ___% of GDP by 2030.

Answer 8

Infrastructure investments needed to help the global economy reach its potential are expected to be around 3.5% of GDP by 2030.​

Question 9

___ ___is a financing of projects using long-term loans secured by the projects assets, with financing costs covered by the project’s cash flows.

Answer 9

Project finance is a financing of projects using long-term loans secured by the projects assets, with financing costs covered by the project’s cash flows.

Question 10

In the U.S., several factors have driven increased private-sector participation in infrastructure:

1. Funding ___
2. ___of infrastructure for new investments
3. Attempts to obtain private-sector ___and ___ ___
4. Favorable ___ ___
5. Availability of ___from private sources

Answer 10

In the U.S., several factors have driven increased private-sector participation in infrastructure:

1. Funding shortfalls
2. Divestitures of infrastructure for new investments
3. Attempts to obtain private-sector management and technical expertise
4. Favorable PPP legislation
5. Availability of financing from private sources

Question 11

3 characteristics drive an infrastructure assets risk/return profile:

1. ___ of ___
2. ___ ___
3. ___scope

Answer 11

3 characteristics drive an infrastructure assets risk/return profile:

1. Stage of maturity
2. Geographic location
3. Sector scope

Question 12

Infrastructure assets can either be ___ or ___assets in terms of their stage of maturity.

Answer 12

Infrastructure assets can either be greenfield or brownfield assets in terms of their stage of maturity.

Question 13

The greenfield phase is quite ___ and ___. It’s risks tend to be ___.

Answer 13

The greenfield phase is quite long and multifaceted. It’s risks tend to be high.

Question 14

Risks of greenfield projects include:

1. ___ and ___risks
2. ___risks
3. ___, ___and ___risks

Answer 14

Risks of greenfield projects include:

1. Design and technological risks
2. Construction risks
3. Economic, legal and political risks

Question 15

The primary risk for brownfield projects are:

1. ___ risk
2. ___and ___risk

Answer 15

The primary risk for brownfield projects are:

1. Revenue risk
2. Operational and maintenance risk

Question 16

An investment would most likely not be made in an infrastructure asset that cannot mitigate ___ or ___risk.

Answer 16

An investment would most likely not be made in an infrastructure asset that cannot mitigate volume or price risk.

Question 17

The demand for infrastructure assets tend to be ___ to price changes and economic downturns.

Answer 17

The demand for infrastructure assets tend to be inelastic to price changes and economic downturns.

Question 18

Infrastructure assets have ___ barriers to entry and ___characteristics.

Answer 18

Infrastructure assets have high barriers to entry and monopolistic characteristics.

Question 19

___ infrastructure prices mitigate downside risk if costs increase, because prices can increase to maintain their target return.

Answer 19

Regulated infrastructure prices mitigate downside risk if costs increase, because prices can increase to maintain their target return.

Question 20

Prices typically (can/cannot) be increased to compensate for capital spending used for improved services.

Answer 20

Prices typically cannot be increased to compensate for capital spending used for improved services.

Question 21

Low ___ costs make infrastructure assets defensive and can support high levels of ___.

Answer 21

Low operating costs make infrastructure assets defensive and can support high levels of leverage.

Question 22

___ infrastructure has the lowest sensitivity to business cycles.

Answer 22

Social infrastructure has the lowest sensitivity to business cycles.

Question 23

___ highways have high sensitivity to economic cycles.

Answer 23

Greenfield highways have high sensitivity to economic cycles.

Question 24

Infrastructure assets should rely on ___ technology and reduce the risk of ___ ___.

Answer 24

Infrastructure assets should rely on proven technology and reduce the risk of technology failure.

Question 25

Some infrastructure assets have ___-linked cash flows, which make them an effective ___hedge.

Answer 25

Some infrastructure assets have inflation-linked cash flows, which make them an effective inflation hedge.

Question 26

Most infrastructure businesses have ___ annual dividend yields.

Answer 26

Most infrastructure businesses have high annual dividend yields.

Question 27

Infrastructure assets have ___ correlations with traditional assets.

Answer 27

Infrastructure assets have low correlations with traditional assets.

Question 28

___ ___are formed by banks and private sponsors that use their own capital and sometimes third-party capital.

Answer 28

Infrastructure funds are formed by banks and private sponsors that use their own capital and sometimes third-party capital.

Question 29

___ ___are entities that may participate in aspects of greenfield or brownfield stages and use asset acquisition to stimulate growth.

Answer 29

Strategic buyers are entities that may participate in aspects of greenfield or brownfield stages and use asset acquisition to stimulate growth.

Question 30

___-type financial sponsors have high expected internal rate of return targets.

Answer 30

Buyout-type financial sponsors have high expected internal rate of return targets.

Question 31

In contrast to long-only bond portfolios, infrastructure project financing is interest rate ___ and is not ___.

Answer 31

In contrast to long-only bond portfolios, infrastructure project financing is interest rate hedged and is not callable.

Question 32

Publicly traded infrastructure assets are generally ___ compared to REITs

Answer 32

Publicly traded infrastructure assets are generally undervalued compared to REITs

Question 33

PPPs and regulated assets (are/are not) typically mutually exclusive.

Answer 33

PPPs and regulated assets are typically mutually exclusive.

Question 34

Private sector investors in PPP typically form a ___ ___ ___.

Answer 34

Private sector investors in PPP typically form a special purpose vehicle.