3 questions to smart minds

Infrastructure investments are in demand

For this 3 questions to R. von Kollmann

Photo: R. von Koll­mann | Solutio
11. Janu­ary 2012

The importance of infra­struc­ture as an asset class has not yet dawned on many inves­tors. In parti­cu­lar, what returns and risks are invol­ved and what regio­nal charac­te­ristics should be included in the considerations.

For this 3 ques­ti­ons to Member of the Manage­ment Board of Solu­tio AG in Munich

1. Why have invest­ments in infra­struc­ture become so attractive?

World­wide, there is an enorm­ous need for invest­ment in trans­por­ta­tion routes, energy plants, commu­ni­ca­ti­ons networks, hospi­tals, etc. Accor­ding to expert esti­ma­tes, more than 41 tril­lion U.S. dollars will flow into the infra­struc­ture sector by 2030. States are incre­asingly with­dra­wing from finan­cing, not least because of the sove­reign debt crisis, and private invest­ment or public-private part­ner­ships are in demand. The asset class is incre­asingly attrac­ting the atten­tion of insti­tu­tio­nal inves­tors because it provi­des secure, constant cash flows that are largely inde­pen­dent of econo­mic cycles.

With infra­struc­ture invest­ments, inves­tors can achieve attrac­tive returns compared to the risk. The port­fo­lio risk can be redu­ced by up to 13.6 percent by adding infra­struc­ture, accor­ding to a study by the Inter­na­tio­nal Real Estate Busi­ness School (IREBS) at the Univer­sity of Regens­burg, which we supported. Appro­xi­m­ately 800 North Ameri­can infra­struc­ture tran­sac­tions were analy­zed. Another study on the situa­tion in Europe is in progress.

2. Who invests in infra­struc­ture projects today?

Due to the high invest­ment volu­mes, mainly insti­tu­tio­nal inves­tors such as pension funds, insu­rance compa­nies, foun­da­ti­ons and banks. Cana­dian and Austra­lian pension funds were the first to reco­gnize the attrac­ti­ve­ness of the asset class and are alre­ady inves­t­ing up to ten percent of their funds in infra­struc­ture projects. Insti­tu­tio­nal inves­tors in Europe are catching up, and we can feel this in our current infra­struc­ture fund of funds APPIA — Global Infra­struc­ture Port­fo­lio. Lead inves­tors here are a German insu­rance company and the pension fund of a Dax group. Demand was surpri­sin­gly high, even for us; that’s why we increased the fund’s target from 200 to 300 million euros. 

3. What distin­gu­is­hes infra­struc­ture invest­ments from commo­di­ties, equi­ties, bonds, real estate or private equity?

In addi­tion to an attrac­tive total return that an inves­tor can expect from the illi­qui­dity premium, among other factors, many infra­struc­ture assets gene­rate current income. These are available to inves­tors as divi­dend payouts and thus provide a contri­bu­tion to the coverage of current payout obli­ga­ti­ons (for exam­ple, of a pension fund).

Current income on regu­la­ted assets is usually inde­xed for infla­tion and ther­e­fore rises with the gene­ral price level. The invest­ments also offer protec­tion against infla­tion due to their “real estate” charac­ter. Last but not least, infra­struc­ture has a low or nega­tive corre­la­tion with conven­tio­nal asset clas­ses, which can lead to very bene­fi­cial effects in a multi-asset portfolio.

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