Unlisted Infrastructure is a subset of the broad category of Alternative assets which in recent decades has elicited a more prominent focus in more sophisticated portfolios. Historically, investment in this sub-asset class was limited to large institutional funds.
After the Global Financial Crisis, alternatives like infrastructure became more attractive to a broader range of investors who were seeking less volatile investments especially in the face of falling interest rates and bond yields.
Hence a supplementary solution was needed to provide an additional return beyond safe, low yielding investments (e.g. Government Bonds) without a high degree of capital fluctuation. This is where Unlisted Infrastructure fits in.
They come in many shapes and sizes
Infrastructure assets tend to be critical to the functioning of a healthy economy, are characterised by high barriers to entry, operate in near monopolistic conditions and benefit from long duration concessions and leases (i.e. 25 to 99 years). Conceptually, this asset class merges the characteristics of both Property and Private Equity while the advent of Renewable and Social Infrastructure, has bridged the gap between financial and Impact / ESG* styled investing. (*Environmental, Social and Corporate Governance)
One defining characteristic from property is that there is an operational component to their valuation and revenue streams that makes them less of a ‘set and forget’ investment.
Unlisted infrastructure assets can fall into a variety of categories such as:
Ports, Airports, Roads, Bridges, Tunnels, Toll Roads, Railways
Energy Distribution Networks, Storage, Power Generation, Water
- Communication Assets
Cable Networks, Data Towers, Satellites.
- Renewable & Alternative Energy
Windfarms, Geothermal, Hydrogen, Natural Gas
- Social Infrastructure
Schools, Healthcare Facilities, Stadiums
How it fits into a modern day portfolio
With such unique characteristics, there are several reasons why an investor may consider Unlisted Infrastructure as part of their diversified portfolio which would be attractive to both the growth and conservative investor alike.
For more growth focused investors, the sub-asset class historically offers a return profile between 8.0 %- 10.0% p.a. with only moderate correlation. In addition, while the returns have historically not matched those of listed equity markets, the asset class reduces the reliance on share investments to achieve positive real return outcomes without introducing more risk.
For more conservative investors who are seeking to reduce volatility within their portfolio, Unlisted Infrastructure has historically been 60% less volatile than listed equity markets investments and has provided a more compelling return profile compared with Australian & International Fixed Interest.
These benefits, although great, do come with a trade-off which is that the investor must give up some liquidity due to the unlisted nature of the asset class. Many strategies require lockup periods of 3 – 5 years with some much longer. They also often come with rigid redemption periods if an investor requires access to their funds prior to a fund liquidity event.
It is also important to observe that the low volatility of the asset class is in part due to the underlying assets being revalued on a monthly or even a quarterly cycle. Hence, asset performance can suffer a performance lag compared with listed investments which benefit from daily repricing.
Finally, the underlying assets aren’t often bought or sold meaning comparable sales data can be hard to locate leading to potentially opaque valuations.
How to implement within a portfolio
Gaining access to Unlisted Infrastructure has historically been difficult for the majority of investors because these types of investments have historically been the domain of only the largest pension funds, insurance companies and banks. It wasn’t uncommon for many unlisted opportunities to require a minimum allocation of $10m or more putting the asset class out of the reach for the general public.
However, the landscape has changed as fund managers respond to investor demand, in particular, Wholesale Investors who can access investment with as little as $50,000 parcels. While these smaller parcel sizes can result in additional fees, the superior diversification and performance can largely offset higher running costs.
In summary, Unlisted Infrastructure is a versatile asset class with enticing characteristics that should be considered for many wholesale investors. As the landscape continues to develop, especially with more focus on Social Infrastructure and Renewable Energy assets, there is more interest than ever from a broadening investor base looking to add more diversification within their portfolios.