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March 24, 2011

Infrastructure Investing: Advantages and Pitfalls

At a time when India- and Asia-focused infrastructure funds are being announced at a rapid clip, Jay A. Yoder, Partner and Head of Real Assets at fund-of-funds firm Altius Associates, provides an analysis of the advantages and downsides of this asset class in an article published in AltAssets. Extracts:

The advantages
Adding infrastructure to an existing portfolio can be expected to provide investors with several important benefits, including attractive returns, moderate risk, diversification, and inflation hedging.... We believe that the best private infrastructure managers can provide net returns to investors of 10 to 14 per cent... At the same time, we expect the volatility to be moderate; somewhere between equities and fixed income. Infrastructure assets are likely to provide a good hedge against inflation. Most infrastructure-related contracts contain clauses that allow for price increases tied to inflation....Our view is that an overweight to the energy subsector greatly increases investors’ likelihood of success by enhancing diversification and increasing the return profile of the portfolio.

The Pitfalls
* Infrastructure assets are not immune to the economic cycle. Utilisation of, and revenues from, many assets will decline during economic slowdowns....

* Very few infrastructure managers have track records of any kind and there have been very few exits...In fact, we believe that many, maybe even most, managers are likely to disappoint their investors...

* New infrastructure funds are being set up all the time, often as spin-outs from the project finance arms of large banks. These folks can sound very plausible in pitches, but there is a world of difference in financing large scale infrastructure projects through bank franchises and judging the best investments for risk capital.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in