Investments  

Getting income for clients using infrastructure

    CPD
    Approx.30min
    Getting income for clients using infrastructure

    As an asset class, infrastructure is more often associated with large institutional investors who buy stakes in trophy assets like Thames Water or Heathrow Airport, than with retail investors.

    The fundamental appeal of infrastructure investments to institutions are the predictable cashflows - often index-linked and derived from long-term contracts with governments, cities or municipalities or other blue-chip counterparties.

    Then there is the appeal of the inherent protection from competition that comes with natural monopolies, regulated assets or concessions granted by public authorities; and the strategic importance of the assets to the UK and its economy.

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    What is often overlooked is that steady cashflows can be a particularly attractive feature for today’s retail investor, especially given the current low interest rate environment where reliable low risk yield is hard to come by.

    Historically a tough asset class for individuals to access, in recent years a number of innovations have brought down the barriers to entry for infrastructure, making it easier for private investors to invest in this traditionally defensive sector and better balance risk and volatility within their personal investment portfolio.

    Most infrastructure assets are of significant strategic importance to the economy. Roads, railways, power stations, renewable energy plants and the like form the fundamental fabric of an efficient society.

    As a result, such infrastructure assets can often be actual or quasi-monopolies, whether by regulation as with Thames Water where they own the infrastructure to deliver water to every customer in London, or naturally such as with mobile phone network infrastructure where high barriers to entry limit competition.

    Many retail investors find the long-term secure contracts associated with infrastructure very appealing. Infrastructure assets play a crucial economic or social role, and so typically benefit from the following:

    ■ long-term government backed contracts in the case of private finance initiative (PFI) projects.

    ■ government subsidies in the case of renewables.

    ■ the ability, via regulation, to charge customers directly, for example water companies and rail operators.

    ■ investment grade offtake contracts (as in the case of power sales to “big six” electricity suppliers).

    Many infrastructure projects have a natural inflation-linkage due to the economic and contractual underpinnings. This is just as attractive for retail investors as for pension funds as a long term hedge against liabilities.

    Renewable infrastructure assets, such as wind and solar have an explicit inflation-hedge through the structure of the government subsidies, which are index-linked to RPI.

    Innovation in the fund management market has provided many ways for retail investors to gain exposure to infrastructure. Until recently, renewable energy producing infrastructure assets such as Solar Farms and Anaerobic Digestion plants qualified under the tax efficient venture capital trust and enterprise investment scheme regimes.

    Significant sums were raised from private investors to help kick-start emerging renewable energy technologies before legislative change meant the assets no longer qualified.