Buildings for eternity

The Pont du Gard shaped Nîmes for millennia. Today's infrastructure buildings also have that potential. (Image: zVg)

Infrastructure projects have always consumed enormous resources. Investors can use it to promote the sustainable development of the economy and society.

Almost everyone has encountered it, at least in French lessons: the Pont du Gard. A huge stone bridge built by the Romans more than two millennia ago to supply Nîmes with drinking water. In fact, in the top row of arcades, there is a water channel that carried spring water at a low but constant gradient over 50 km to Nîmes, 20,000 liters a day. The Pont du Gard took more than 1,000 workers three years to build and is now a UNESCO World Heritage Site. It has left an impressive mark on the region for decades, centuries and even millennia – just as our infrastructure buildings today shape the places where they are realized.

Among assets under management internationally, investments in infrastructure projects represented the fastest-growing private market asset segment over the past decade, according to London-based data provider Preqin. During this period, these investments have almost quadrupled. 639 billion last fall. US dollar. The number of unlisted infrastructure funds on the market as of July 2021 is up a whopping 25% since the beginning of the year. A new record has thus been reached. In total, there were 328 funds, representing a total capital of 238 billion. U.S. dollars.

After fundraising slowed a year ago, observes Peter Bezak, director communications& RfP at Zurich Invest on how the Covid 19 pandemic is now sparking new interest in infrastructure funds. "Investments made in utility networks, social facilities and manufacturing plants generally held their promise in terms of their risk-return profile during the pandemic. Covid-19 was probably the first major test that the infrastructure asset class had to pass since it was developed", he explains. And because it has held up quite well as an asset class, the trend to invest in infrastructure continues unabated, he said.

He sees the long-lasting low interest rate environment, booming stock market prices that have reached dizzying heights, and the fact that infrastructure investments have comparatively little correlation with traditional financial markets as the reasons for this development. The latter, in particular, is a key reason why investments in infrastructure projects are ideally suited for risk diversification within a portfolio.

Trillion dollar infrastructure package in the USA

"Infrastructure spending can be expected to continue to increase. The focus will be on projects that achieve sustainable development goals", said Bezak. Infrastructure is currently receiving special attention in the U.S., where the Senate passed a comprehensive trillion-dollar infrastructure package in August. It capped weeks of intense negotiations and debate over the largest federal investment in the nation's aging public infrastructure in more than a decade.

Investors are more active in Europe

Regardless of the extent of private market involvement in implementing the goals of the infrastructure legislation, private infrastructure funds will have ample opportunity to invest generously in the U.S., Bezak is convinced. However, North America has so far lagged behind Europe in the total value of infrastructure deals in 2020 and the first half of 2021. In Europe, the total value of infrastructure deals exceeded 100 billion euros in both periods. US dollars and thus significantly higher than in North America at 80 and around 60 billion. US Dollar.

Increasing demand in Switzerland

Many Swiss pension funds are also showing increasing interest in infrastructure, which is reflected in the number of inquiries they receive from investment consultants. "Reasons for this, however, are not only to be found in the low interest rate environment, the lack of alternatives and diversification. Another reason is that since October 2020, infrastructure investments no longer fall into the category of alternative investments in the investment guidelines for pension funds.", explains the expert. Swiss pension funds can now invest up to 10% of their assets in this new asset class, according to the revised BVV 2 ordinance. At present, the average infrastructure allocation is around 1%," explains the expert. However, some pension funds are planning to increase these investments and consider a ratio of 3-5% optimal in the medium term.

Various investment opportunities

Investors should diversify their risks. Investments in infrastructure assets of different sectors, subsectors and regions help as well as the use of different investment instruments. There are primary and secondary target funds as well as co-investments to choose from. Secondary investment programs in particular have grown rapidly over the past decade, Bezak says: "Their main advantage is that they eliminate much of the blind pool risk. This means that at the time of the investment decision and in contrast to a primary fund, some of the investment objects are already known." Secondary funds, like primary funds, come with some disadvantages, however, such as high fee stratification. In addition, the investor loses control over the investment as it is managed by a manager.

Direct investments offer an alternative. However, most investors lack the appropriate network and the necessary experience to do so. In addition, direct investments are generally subject to higher overall fees. The longer J-curve and greater asset concentration also ultimately lead to a higher loss potential.

Co-investments are particularly efficient

"Co-investments, in our view, offer investors the most efficient investment solution. They provide optimal diversification while mitigating some of the risks and challenges associated with primary and secondary target-date funds. The fund manager of a co-investment approach works closely with individual primary funds to evaluate which managers have strengths in which sectors", explains Bezak. Since the individual projects usually have a higher investment requirement than the fund manager himself can raise in resources, they usually offer a favorable "ride". The co-investor, he said, can thus stay in control and select those projects where risk, return and other characteristics align with his own goals and investment guidelines. Summa summarum can be diversified with co-investments without additional costs more targeted, broader and more controlled than it is the case with direct investment programs or even funds.

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