A Paradigm Shift: Infrastructure Equity 2.0
Historically viewed as a yield-oriented and inflation-protected (but lower returning) asset class, infrastructure equity is transitioning to assets that could drive alpha in an investor’s portfolio.
Infrastructure Equity 2.0: The Evolution from Toll Roads to Carbon Capture
Infrastructure investing is changing. For decades, the asset class has been characterized by assets that provide essential services that are highly regulated, and comprise a single asset or project with long-term contracted revenues backed by an investment grade counterparty. This includes assets such as toll roads, utilities, and ports. The majority of the investment return of these assets is driven by income as opposed to asset appreciation. Given the downside protection, contracted cash flows and current yield, these investments typically command high valuations and drive significant competition.
However, over the past 10 years, the opportunity set has evolved into a new version of infrastructure. Compared with the toll roads and ports of the past, “Infrastructure Equity 2.0” includes companies and projects that are more distributed in nature (i.e., typically fixed assets that are distributed spatially), smaller in scale, and composed of multiple assets. These companies and projects are typically characterized by:
- More conservative capital structures (often with modest or no leverage),
- Fixed-rate debt with medium- to long-term maturities,
- Inflation protection,
- Contracted cash flows.
