Infrastructure investment: an asset class with impact

Are you interested in the infrastructure asset class and want to better understand how infrastructure projects are financed, so that you can offer your clients the opportunity to invest in impact investment funds? Find out from Private Corner, a management company pioneering the institutionalization of private equity, how to invest in Brownfield and Greenfield infrastructure through unlisted investment funds that support infrastructure projects essential to the development of the French economy.

What is an infrastructure project?

An infrastructure project is a project to design, build, install, maintain or upgrade structures and systems needed to support various human, economic or social activities. Infrastructure projects can vary in size and complexity, from small local projects to large national or international projects. Infrastructure projects are often financed and managed by government entities (local, regional, national levels) or by private companies through different investment strategies (Core Infrastructure, Core Plus, Value Add or via Private Equity Infrastructure investment funds), or even through public-private partnerships (PPP) where the government collaborates with the private sector to design, finance, build and operate the infrastructure. These projects are crucial to the economic development, quality of life and competitiveness of a region or country, as they provide the necessary foundations to support the full range of social and economic activities.

Sectors concerned by infrastructure projects

Many sectors are concerned by this term:

Transportation

This includes roads, bridges, railroads, airports, seaports, freeways, metro lines and so on. These infrastructures are essential for the movement of people and goods.

Energy

This refers to the production and transmission of electricity, natural gas, oil and other forms of energy. Examples include power plants, electricity grids and pipelines.

Natural resource management

This type of infrastructure project includes, for example, water treatment plants, drinking water distribution networks, wastewater collection systems and sewage treatment plants. It also includes land extraction infrastructures such as mines.

Public administration and education

In this case, for education, we're thinking of the construction of schools, colleges, high schools, universities, libraries and other educational facilities. Administrative infrastructures include administrative buildings, courts, fire stations, police stations, etc.

Healthcare

Health infrastructure includes hospitals, clinics, medical laboratories and other specialized care centers.

Communications

Telecommunications networks, including fixed-line, mobile and Internet networks, as well as broadcast antennas.

Leisure and entertainment

Stadiums, parks, convention centers, theaters, cinemas and other leisure facilities.

Industry

Buildings such as factories, warehouses and industrial parks are all infrastructures linked to the production and distribution of goods.

The environment

Last but not least, this fast-growing branch of infrastructure includes projects aimed at adapting to climate change, such as water management projects, as well as environmental projects such as nature parks and waste management facilities. If you would like to invest in private equity funds, discover our 100% digital private equity platform.

Why invest in infrastructure?

Infrastructure investment has a direct impact on the economy by contributing to the development and modernization of essential infrastructure, which can drive economic growth and improve quality of life. These investments have numerous benefits for the entire ecosystem of investors, as well as for businesses and economies more generally.

Stimulating economic growth

Well-developed and modernized infrastructures, such as roads, bridges, airports, transportation networks, energy grids and telecommunications, are essential to economic growth. They promote trade, investment, employment and productivity.

Job creation

Infrastructure projects are often labor-intensive in terms of construction, maintenance and operation. As a result, infrastructure investments create jobs in a variety of sectors.

Improving quality of life

Public infrastructure, such as public transit systems, parks, daycare centers, schools and hospitals, helps improve the quality of life for local residents. They provide essential services and community facilities. These investments also enable us to respond to social, societal and environmental changes in our economies. This includes modernizing existing infrastructures and creating new ones to support these global challenges.

Public safety

Infrastructure plays an essential role in public safety. For example, roads and bridges in good condition are essential for safe travel, and water treatment infrastructure is crucial for ensuring a safe supply of drinking water.

Reducing operating costs

Modern, efficient infrastructure reduces operating costs for businesses. For example, a reliable transport network can reduce logistics costs, which in turn can improve companies' competitiveness and optimize their carbon footprint. Investment in infrastructure thus strengthens the competitiveness of a region or country by creating a business-friendly environment, reducing logistical bottlenecks, and stimulating innovation.

Sustainable development

Infrastructure can be designed and built to promote sustainable development, by integrating environmentally-friendly practices, promoting energy efficiency, and using clean technologies. Efficient infrastructure also makes it possible to optimize the use of resources, whether water, energy, waste or other essential resources.

Infrastructure investment has low correlation with other assets

Infrastructure has a low correlation with other asset classes, mainly because it covers a range of services essential to human activities. Depending on the category of infrastructure and the type of projects financed, some characteristics are more akin to bonds, with regular, predictable current yields, while others are more akin to private equity, with less predictable cash flows but greater prospects of capital gains on exit. In conclusion, infrastructure investments are essential for economic development, quality of life, public safety and long-term competitiveness. They have a positive impact on society as a whole, and drive economic growth. However, even more than any other investment, it is important to understand these investments to ensure that they meet society's current and future needs in a sustainable way.

What is Greenfield infrastructure?

Greenfield infrastructure refers to new infrastructure projects and developments built from scratch on previously undeveloped or vacant land. These projects are typically launched in areas where little or no existing infrastructure exists, and involve the construction and development of entirely new facilities or networks, on land or sites that have not been previously developed or have limited existing infrastructure. This can include rural areas, bare land or undeveloped urban spaces. Greenfield infrastructure projects can cover a wide range of sectors, including transport, energy, telecommunications, real estate and more. Greenfield infrastructure thus involves the construction of entirely new facilities, rather than the expansion or renovation of existing ones. These projects often begin with land acquisition and site development. Greenfield infrastructure offers a high degree of customization. Planners and developers can design infrastructure to meet specific needs and take advantage of the latest sustainable technologies and practices. Greenfield projects often have longer development times than Brownfield projects, involving the redevelopment of existing infrastructure. The construction of new facilities, utilities and transportation networks can be very time-consuming. However, a Greenfield project generally involves less complexity in terms of integrating new infrastructure with existing systems. This can be an advantage in terms of project planning and execution. With land untouched by infrastructure, the focus is more on environmental considerations. Developers will need to assess and mitigate environmental impacts and comply with strict regulations, particularly when projects involve ecologically sensitive areas. Their development can be costly, often requiring significant investment: land acquisition, design, construction and the provision of utilities and related services. To illustrate Greenfield infrastructure projects, here are a few examples: • Construction of a new airport in an undeveloped area • Construction of a brand-new industrial park • Development of a new renewable energy facility • Establishment of new transportation corridors Greenfield projects therefore offer the opportunity to create a modern, efficient and sustainable infrastructure. However, they also bring unique challenges and considerations, including environmental impact assessments, the need to build services, utility support and significant financial investments that can be carried by investment funds specializing in Infrastructure investments.

What is Brownfield infrastructure?

Brownfield infrastructure refers to the redevelopment, repurposing or expansion of existing infrastructure that has been previously developed and may no longer be used in its current state or is under-utilized. These infrastructure redevelopments involve renovating or reconfiguring existing facilities, land or structures to meet new needs, rather than starting from scratch on undeveloped land, as in the case of Greenfield infrastructure. Brownfield projects are therefore undertaken on sites or properties with existing infrastructure, which can include former industrial sites, abandoned buildings, old factories, disused transportation hubs, contaminated land for rehabilitation or other underutilized locations. The main objective is to reuse and renovate existing infrastructure to meet new needs... Many Brownfield Infrastructure projects are centered in urban areas where there is a need for revitalization and urban redevelopment. By reusing existing infrastructure, these projects can contribute to the renewal of urban spaces. As these redevelopments often prioritize sustainability by using existing infrastructure, minimizing land use and reducing construction waste, they promote efficient land use in developed areas, which can help combat urban sprawl. Brownfield development can also address environmental concerns, such as soil or groundwater contamination linked to previous land use. In such cases, developers must assess and mitigate any environmental concerns. In some cases, Brownfield infrastructure projects may have shorter development times than Greenfield infrastructure projects. This is because some infrastructure is already in place, which can speed up the development process. On the other hand, these infrastructure projects may involve integrating new uses with existing structures or systems, which can present design and construction challenges. Below are just a few examples of Brownfield infrastructure projects: • Conversion of an abandoned factory into lofts • Redevelopment of a disused military site • Transforming a train station into a transportation hub Brownfield infrastructure projects contribute to the efficient use of land and resources, and to urban revitalization. They also offer economic and social benefits by creating new opportunities for business, housing and community space within existing urban areas.

Infrastructure investment strategies

Infrastructure brings together different strategies for different assets. The resulting returns can be higher or lower. Players can also be specialized by asset class.

Core Infrastructure

Core Infrastructure comprises assets covering the most essential needs. This is the least risky asset class within the infrastructure sector. It includes, for example, energy transmission networks with regulated yields, wind farms or photovoltaic plants with long-term electricity sales contracts, or infrastructure under contract to the state as part of Public-Private Partnerships ("PPP"), which can sometimes guarantee fixed income for the asset subject to availability. In Core Infrastructure, the investment is long-term, between ten and twenty-five years, and sometimes longer. Cash flows are very stable, predictable and not very crisis-prone. During the COVID pandemic, for example, Core Infrastructure responded very well. The revenue structure is very important in determining the risk profile of an infrastructure asset. For example, a power generation plant with long-term electricity sales contracts has a low risk profile, which will correspond to Core Infrastructure. On the other hand, a company in the same sector with exclusively merchant-type revenues, i.e. where electricity is sold at a market price that fluctuates and is not guaranteed over the long term, will have a much higher risk profile. In return, the return on a Core Infrastructure asset is naturally lower, with IRRs of 7-8%. Unlike traditional private equity, which is mainly remunerated on the sale of the company after five to seven years, the return on Core Infrastructure assets is mainly obtained through the annual distribution of dividends (cash yield). This financial model is made possible by the visibility and regularity of cash flows. In some contracts, for example, the government will pay the operator a fixed amount for twenty or thirty years to ensure that the asset remains available. The risk is therefore very limited for projects in countries with sustainable public finances.

Core Plus

Core Plus is similar to Core Infrastructure, but the risk, and therefore the return, is higher. These are still real assets, but they are not necessarily regulated and are less monopolistic. Examples include certain airports, which carry a traffic risk and a share of commercial revenues, telecom towers or data centers, which may have shorter-term contracts. The visibility of cash generation is more limited, due to greater risks on revenues or operations management. These are always long-term investments, between ten and fifteen years. The final IRR, of the order of 8-10%, is made up of both the dividends distributed each year and the resale value.

The Value Add

The Value Add segment is made up of assets that are riskier than those in Core Plus, but offer a better return in return. They may require the implementation of "buy-and-build" strategies, which can be executed through the deployment of organic growth investments or targeted acquisitions (M&A). This can also take the form of operational improvements (changes in cost structure, sales strategy, asset disposals, etc.). Dividend payouts will therefore be more restricted, as visibility on cash generation is more limited. The IRR, of the order of 10% to 15%, will therefore come from the resale of the asset after five or six years.

Private Equity Infrastructure

Beyond the Value Add segment, these operations are akin to more traditional private equity, with a broadly similar investment strategy but even higher returns (15-20%+) because the assets are riskier. In addition, changes in the type of investor and the broadening of the asset class are leading to a rethinking of what constitutes an infrastructure asset. Some investment funds specializing in infrastructure will classify transactions in this sector when they don't actually own the underlying asset (for example, an investment in a company that leases the infrastructure it operates), or transactions in markets that present few barriers to entry. It's also worth noting that in the Core Plus or Value Add categories, many investments are made in companies rather than projects (special purpose vehicles, "SPVs"). For example, a company managing several motorway concessions, with a management team, employees and a commercial strategy to expand into ancillary areas (maintenance services, engineering, toll systems, service stations, etc.). This approach is very similar to that of traditional private equity. The management teams work with management on their business model and strategy. Conversely, an SPV will contain just the financing put in place by the sponsors and the assets (e.g. a wind farm) whose management is usually contracted out to industrial operators, with no management team or employees.

To remember: the 5 advantages of infrastructure investment

Stable returns

Infrastructure assets, such as freeways, airports, ports, power plants and water networks, are often considered essential assets with predictable revenue streams. Rates and revenues are often regulated or contracted over long periods, offering investors a degree of yield stability.

Inflation protection

Infrastructure assets are often indexed to inflation, either through contractual clauses or regulations. This means that the income generated by these assets can rise with inflation.

Portfolio diversification

Returns on infrastructure assets tend to be less correlated with those of traditional equities and bonds. This can help diversify an investment portfolio, reducing overall risk.

Long-term growth potential

As the world's infrastructure needs evolve (e.g., transition to renewable energies, urban development, modernization of transport networks), there is significant potential for long-term growth in this sector.

Positive impact on society

Investing in infrastructure contributes to the development and modernization of the essential services on which society depends. This can offer not only financial returns, but also a positive impact on the community by improving quality of life, promoting economic growth and creating jobs. However, as with any investment, it's crucial to understand the associated risks and consult a financial professional before making a decision.

Disclaimer:

Private Corner is a company approved as a portfolio management company on 05/11/2020 by the Autorité des marchés financiers under number GP- 20000038. Investing in alternative investment funds (FIA) involves risks of capital loss and liquidity. Funds invested are frozen for a minimum of 10 years. Investment in investment funds is reserved for professional or well-informed investors. Past performance is not a guide to future performance, and there is no guarantee that objectives will be achieved. All information presented is Private Corner's own opinion and interpretation. Commercial document intended exclusively for wealth management advisors, private banks and family offices. To find out more about the infrastructure asset class, please call us on 00 33 1 83 75 66 95 or contact us by e-mail: contact@private-corner.eu.