Exploring Infrastructure Investments | CFA Level I Alternative Investments

In this lesson, we’ll dive into the last category of alternative investments – infrastructure investments. You’ll learn about the different ways to categorize these investments, their various forms, and their associated risks and returns.

Classifying Infrastructure Investments

Infrastructure can be broadly classified based on the type of asset and the stage of development. Here’s a breakdown:

Type of Asset:

1. Economic infrastructure – assets necessary to support economic activity, such as transportation and utility assets.
2. Social infrastructure – assets directed toward human activities, such as educational, healthcare, and prisons.

Stage of Development:

1. Brownfield investments – investing in existing infrastructure, usually with some financial and operating history.
2. Greenfield investments – investing in infrastructure to be constructed, with the intent to hold, operate, lease, or sell the assets upon completion.

Additionally, infrastructure investments can be categorized based on their geographical location, which can significantly impact their risks and expected returns.

Forms of Infrastructure Investments

Investors can either invest directly in the underlying infrastructure or indirectly through various investment vehicles. Here’s a quick overview:

1. Direct investments – provide control over the asset and the opportunity to capture the full value, but require a large investment and come with concentration, liquidity, and management risks.
2. Indirect investments – include shares of companies, exchange-traded funds, private equity funds, and master limited partnerships (MLPs) that invest in infrastructure. These securities offer liquidity, diversification, and transparency, but may only represent a small segment of the infrastructure investment universe.

Risks and Expected Returns

The risks and expected returns of infrastructure investments vary based on the asset type, stage of development, and geographical location of the underlying asset. Moreover, the form of investment also affects risks and expected returns.

In general, brownfield investments provide stable cash flows and relatively high yields, but little potential for growth. Greenfield investments, on the other hand, come with more uncertainty, relatively lower yields, but greater growth potential.

For instance, an investment in an MLP with a brownfield investment in a developed country is considered lower risk than a private equity fund with a greenfield investment in an emerging market.

While infrastructure investments can provide diversification benefits, they also come with risks such as regulatory risk, financial leverage risk, and the possibility of lower-than-expected cash flows. Greenfield investments, in particular, carry construction risk, and privately owned and operated assets come with operational risk.