What is infrastructure investing?
Infrastructure companies play a vital role in building and operating structures and facilities necessary for a functioning society and productive economy. These companies cover sectors, including:
-
Utilities
: Gas, water, waste and electricity networks -
Energy
: Oil and gas storage and transportation. -
Transportation
: Roads, railways, bridges, toll roads, and airports. -
Communications
: Telecommunication and satellite services. -
Social facilities
: includes hospitals, schools and correctional facilities.
Infrastructure investing involves owning a part of these essential assets, holding the rights to their use and benefiting from the income generated as society pays to use those resources1. These income-producing assets are built for long-term use, requiring large capital spending initially and smaller ongoing costs to sustain their operations.
A defining feature of infrastructure assets is their high barriers to entry. Infrastructure companies are often operating as a monopoly or duopoly. In most instances, governments grant exclusive rights for specific assets to a chosen firm rather than allowing multiple firms to operate similar assets and compete for market share. This regulation aims to ensure efficiency and profitability, preventing scenarios such as having several electricity networks competing in a single city. Governments regulate the prices charged for services attached to these infrastructure assets to ensure a balance between the owners receiving an attractive return on their capital and offering fair prices to the public.
What are examples of infrastructure companies?
Examples of infrastructure securities include:
- Aena (BME: AENA): A state-owned Spanish company operating globally as an airport operator, owning and managing over 60 airports in Spain, London and the Americas2.
- Transurban Group (ASX: TCL): An Australian company specialising in the construction and operation of toll roads domestically and in North America3.
- NextEra Energy (NYSE: NEE): A key player in the energy infrastructure sector. Its regulated utilities business supplies electricity to more than 12 million residents in Florida4. NextEra’s clean energy subsidiaries collectively produce more wind and solar power than any other company globally and are a leader in battery storage.
Why invest in infrastructure?
Investing in infrastructure is appealing to investors as they gain access to:
Predictable income, resilient to economic cycles
Infrastructure investments are known to offer steady and reliable cash flows to investors. Revenues generated are often secured through long-term contracts with creditworthy entities, generally government bodies.
The services provided by infrastructure firms exhibit inelastic demand, whereby consumption patterns are largely unaffected by price fluctuations or economic cycles. For example, we will always demand electricity to power our homes even if a recession strikes. Regulation paired with providing essential services contributes to long-term revenue visibility and more stable cash flows, which are relatively recession-proof compared to companies in sectors such as retail.
Potential inflation protection
In addition to being less sensitive to slowing economic growth, many infrastructure companies mitigate the impact of rising prices through:
- regulated fees that undergo annual Consumer Price Index (CPI)-based adjustments, as is often the case with airports or toll roads, or
- directly passing on higher costs to the consumer through increased prices, as is common with utility companies
As such, infrastructure companies can offer protection against inflation and rising rates.
Diversification from traditional asset classes
As an asset class, listed infrastructure companies typically have a low correlation to traditional asset classes like US equities due to their unique characteristics. Our research finds that integrating global infrastructure to a portfolio has the potential to increase returns while diversifying risk1.