5 (good) reasons to invest in unlisted infrastructure

Infrastructure is in vogue, and for good reasons! Here are 5 of them, ranging from performance to inflation protection to accelerating the energy transition.

Direct investments in infrastructure are not only financially appealing but also very useful to society. In addition to their intrinsic benefits, it now seems like a particularly good time to get started.

1. Stable and recurring cash flow

In Europe, direct infrastructure investments are particularly suitable for institutional investors looking for attractive and, above all, stable returns. Depending on the project, its stage of development and its life span, average annual returns of 5% to 7% can be expected, with capital gains at exit allowing IRRs to reach 8% to 12%. The revenues received by the projects benefit from a very long term visibility (often several decades) independently of the economic cycle, and are largely uncorrelated with traditional financial markets.

2. A good protection against inflation

Another advantage, and not the least at the moment, is that infrastructure investments are an effective hedge against inflation. Most contracts provide for indexation to the consumer price index, whether for tolls, rents, water prices or electricity rates. The income is therefore automatically adjusted to inflation, thus protecting the investor against the devaluation of their returns and capital.

3. Sustainable and solid projects

The projects financed are usually public infrastructures that are essential to the economy and society, such as transport networks, hospitals, universities, water treatment and supply plants, power generation plants or telecommunications equipment. They correspond to needs that will not disappear in the short term and are therefore particularly sustainable. In addition, the projects often rely on proven risk transfer mechanisms. Finally, the operators operate in regulated or less competitive markets, with a physical and/or contractual monopoly.

4. Tangible and socially useful investments

Unlike many of today’s investments, which are increasingly virtual, infrastructure projects are tangible and respond to concrete needs. They contribute to improving the living and working environment, economic efficiency, or participate in a dynamic of development and equipment of communities, companies, and more generally of urban, rural or mixed areas, while creating jobs. And whatever one may say, privatization can have virtuous effects. This is particularly true of investments in water networks, which suffer from enormous losses of a vital resource due to leaks that can often represent nearly a third of the volumes treated. A private operator will naturally be motivated to invest in upgrading its network to avoid losing money. By investing in infrastructure, investors can achieve an attractive return while making a positive contribution to society, which is far from negligible.

5. A unique window of opportunity

After a long delay – due to the 2008 financial crisis and subsequent budget cuts – in modernizing its infrastructure and making a firm commitment to decarbonize and digitalize its economy, Europe seems to have finally risen to the challenge, helped, it is true, by the COVID crisis and the conflict in Ukraine, which have shifted political priorities. Europe has thus launched several massive investment plans, in particular to accelerate the energy transition, on an unprecedented scale, such as the Green Deal (EUR 7 trillion), the post-Covid Next Generation EU recovery plan (EUR 800 billion), the „Fit for 55“ program (EUR 3.7 trillion) and the REPowerEU plan (EUR 300 billion).

Currently, there is no shortage of infrastructure investment opportunities, from building renewable energy plants to the widespread installation of charging stations for electric vehicles, by way of the densification of fibre optic networks, the renovation of public hospitals and universities, and the renovation or upgrading of water networks and transportation infrastructure. Direct investments in infrastructure are usually made through private equity funds, which are closed after their launch. Fortunately, given the strong deal flow we are currently seeing, several infrastructure funds are launching new vintages, providing investors with a window of opportunity.

Because of its sound public finances, Switzerland has always favoured public financing for all its infrastructures and thus has very little recourse to private financing, unlike its European neighbours. The culture of Public/Private Partnerships is therefore not yet inscribed in our DNA. This is undoubtedly regrettable because it prevents our authorities from carrying out multiple projects simultaneously and therefore limits capacities. To be convinced of this, we need only look at the time it takes (in French-speaking Switzerland at least) to develop the railway network. The urgency of the energy transition and the huge investments it requires will perhaps force a change of attitude in this area.