Level 1 CFA® Exam:
Infrastructure
Infrastructure investments:
- include investments in real, capital-intensive assets like roads, dams, schools, sewage treatment plants, etc.
- serve the public,
- are mainly owned by governments but the public-private partnerships (aka. PPP) approach to investment is also getting more popular.
Characteristics of Infrastructure Investments
Infrastructure investments:
- are strategically important,
- are monopolistic,
- are regulated,
- are characterized by stable long-term cash flows,
- need significant capital investment,
- have clearly defined risks,
- often use leveraged structure,
- offer long operational life,
- nowadays very often meet environmental, social, and governance (ESG) criteria.
What are the characteristics of low-risk infrastructure investments?
In comparison to high-risk infrastructure investments, low-risk investments are characterized by more stable cash flows, higher dividend payout ratios, lower growth opportunities, and lower overall expected returns.
The risk profile of infrastructure investments changes as time passes. In the later stages of the investment, the risk is lower but the expected return is lower as well.
Infrastructure Risk Management
| Performance Risks | Structural Risks |
|---|---|
| demand/volume risk; operational risk; construction risk | financing/interest rate risk; regulatory risk; political risk; currency risk; tax/profit repatriation risk |
We can distinguish among different categories of infrastructure investments based on different criteria.
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Forms of Infrastructure Investments
Infrastructure investments take 2 forms:
- direct investment in assets, and
- indirect investment vehicles: (a) infrastructure funds, (b) infrastructure ETFs, and (c) company shares.
The advantages of direct investment are full control over investment and access to the total created value. The disadvantages of direct investment are increased risks, e.g. operating risk, liquidity risk, concentration risk, etc.
Because of the above-mentioned risks, direct investments in infrastructure usually take the form of a consortium, where strategic partners can mitigate operating risks and financial investors can absorb individual concentration risks.
In the case of indirect investments, most investors prefer equity investment over debt or mezzanine investments.
- Infrastructure investments include investments in real, capital-intensive assets like roads, dams, schools, sewage treatment plants, etc.
- The risk profile of infrastructure investments changes as time passes. In the later stages of the investment, the risk is lower but the expected return is lower as well.
- Infrastructure investments take 2 forms: direct investment in assets, and indirect investment vehicles: (a) infrastructure funds, (b) infrastructure ETFs, and (c) company shares.
- In the case of indirect investments, most investors prefer equity investment over debt or mezzanine investments.