Infrastructure Funds

Question 1

What is infrastructure?

Answer 1

The basic physical systems and services a country, city or region needs to operative effectively

Question 2

What are some examples of infrastucture?

Answer 2

1) Utilities (water, electricity)
2) Schools, hospitals, airpots
3) Transport (buses, terminals, railways

Question 3

What are some examples of green infrastructure?

Answer 3

1) Solar Panels & Wind Farms
2) Walkways, cyclepaths
3) Green scapes (woodlands, gardens, parks & allotments)

Question 4

What are the key characteristics of infrastructure assets?

Answer 4

1) Large physical assets - making the market a natural monopoly
2) Long duration - projects take a long time to complete
3) High barriers to entry
4) Consistent, predictable income streams
5) Uncorrelated returns to equity / bonds

Question 5

What are regulated infrastructure assets?

Answer 5

Assets associated with essential services such as water and electricity. Prices and demand tend not to fluctuate and as such revenue streams are consistent and predictable.

They are a lower risk asset class

Question 6

What are unregulated infrastructure assets?

Answer 6

Assets where the owner is free to set prices with their cusomter. Usually social infrastructure such as Schools and hospitals.

Also includes defense.

Question 7

Infrastructure suffers from “lumpiness”. What does this mean.

Give an example.

Answer 7

Lumpiness means the “indivisibility of inputs”. As output changes small tweaks to inputs don’t work.

Instead large capital expenditure is needed.

e.g. new runway at an airport

Question 8

Why is liquidity an issue for infrastructure funds?

Answer 8

1) Projects and take years / decades (time horizon can be extended)
2) Only exit at pre-determined exit points
3) Suitable for long term investors (pension funds)

Question 9

How can liquidity issues be minimised in infrastructure investments?

Answer 9

Invest in shares that invest in infrastructure companies
1) Shorter time horizon
2) Trading venue means more liquidity

Question 10

How does a fall in liquidity also affect shares that invest in infrastructure companies?

Answer 10

Fall in value of the companies can create less desired exit points

Question 11

Returns on infrastrucure funds:

1) Correlation to other assets?
2) Dependancy on business cycle stage?
3) Inflation performance?
4) Cash flows?

Answer 11

1) Low correlation to other assets
2) undependant on business cycle
3) Inflation linked contracts and levies can hedge vs inflation (mostly monopolistic assets)
4) Stable predictable cash flows

Question 12

What risks are there in infrastructure investments?

Answer 12

1) Commodity Prices
2) Local / Political Opposition (HS2)
3) Macroeconomic Shocks
4) Corruption (Argentina ‘97 and ‘02)