The pros and cons of listed infrastructure

Mr Hollands observes at a time when global spend on infrastructure development is forecast to increase significantly over the next decade, it is important for potential investors to understand how listed infrastructure differs from unlisted infrastructure.

Clear distinction

So what are the pros and cons of investing in listed infrastructure?

“Investors do need to make a clear distinction between investing in actual operational infrastructure projects (typically through a listed investment company) such as toll roads, hospitals, prisons and schools on the one hand and buying the shares of stock listed companies involved in infrastructure, such as power companies and owners of airports or roads,” he notes.

“The former provides access to very long-term contracts (often in the form of public/private sector partnerships), with stable income streams and usually with a high degree of inflation proofing built into their contracts.

“In contrast infrastructure equities – and funds which invest in them – are ultimately global thematic equity funds, with equity market risk and volatility. The latter do not, therefore, provide the same diversification benefits as actual projects, nor do they generate high levels of income yield.”

Mr Meany observes that while unlisted infrastructure has smoother reported returns, giving it lower volatility and a lower correlation to equity market returns, it does come with execution, monitoring and valuation risks. 

“Listed infrastructure has market risk but offers liquidity, diversification and relative value,” he points out. “This has led some investors to use listed as a liquid complement to unlisted infrastructure allocations, as it enables them to easily adjust a portfolio’s overall infrastructure exposure at the margins.”

In terms of drawbacks, if we do start to see the interest rate cycle turning this could prove to be a detractor for areas of infrastructure shares that behave like bond proxies.Gavin Haynes

There are practical differences between a minority investment position in a listed security and ownership of unlisted assets, with advantages and disadvantages for both, according to Nick Langley, co-chief executive officer and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate.

“With unlisted infrastructure, an investor may be able to exert a material level of control over the management of the infrastructure asset, and the opportunity set is wider – unlisted infrastructure assets include social infrastructure assets which are not typically found in the listed infrastructure market, such as hospitals, prisons, and schools. 

“However, listed infrastructure has a deeper opportunity set – there are significantly more infrastructure companies to invest in globally then there are unlisted infrastructure projects – greater liquidity (resulting in a more flexible approach to entering and existing investments), and typically lower fees,” he points out.