| Infrastructure Fund 101 |
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| 19/02/2006 | |
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Arthur Rakowski, Executive Director, Macquarie Bank Group, London, answers this week's 101 on infrastructure funds 1-What is an infrastructure fund? What are the main categories of infrastructure funds? An infrastructure fund is a managed vehicle through which investors gain exposure to the underlying characteristics of infrastructure assets. Infrastructure is emerging strongly as an asset class which can be particularly well suited to pension funds and other investors with a long-term outlook. Infrastructure assets tend to display comparatively stable, long-term real returns and provide a good match for long-dated liabilities. They invest in private infrastructure companies, but the funds themselves can be listed or unlisted. For example, Macquarie has been investing in infrastructure for more than a decade and now manages over 20 infrastructure funds around the world. Half of these are listed on the stock exchange, with investors from pension funds and other institutions to retail investors. The rest are unlisted funds in which the investors are largely pension funds and other institutions. The funds tend to either specialise in one class of infrastructure – for example invest only in airports or only in toll-roads – or they invest across various infrastructure sectors which meet specified investment criteria – for example the Macquarie European Infrastructure Fund has investments from water and gas utilities through to rail. In addition, they can have a global or regional focus. Infrastructure assets can include telecommunications and broadcast infrastructure, utilities, toll roads, airports and other transport infrastructure. Fundamentally, infrastructure assets are distinguished by displaying the following key characteristics: · Provide essential community services · Have strategic competitive advantage · Have predictable long-term cashflow These characteristics lead to the investment benefits outlined below. 2-What is the objective of investing in this type of vehicle for an institutional investor? Is it a good diversifier? Why? Infrastructure assets display unique characteristics. Their essential and long-term nature, combined with strong competitive position, leads to stable and predictable consumer demand and cash generation. These assets tend to have a high fixed capital base with comparatively low operating costs - on average of between 10% and 30% of revenue. Along with the long-term operating licence and predictable demand, often in a regulated environment, this allows the manager to forecast cashflows with accuracy. Infrastructure assets have a low correlation to equity markets and other main asset classes. For this reason, it can provide valuable diversification in an investment portfolio. It also provides a good match for the long-dated liabilities of pension funds due its long-life and inflation protected returns. This stability in operating cashflows can reduce the overall volatility of returns for investors and, in our experience, investors are finding this combination of sustainable yields, lower volatility and inflation-linked returns increasingly appealing. By investing in infrastructure through a specialised fund, investors not only gain access to infrastructure as an asset class, but they benefit from the expertise that the fund manager can bring to asset selection and management. 3-What are the main downsides of this type of fund for an investor? · As mentioned above, cashflows from infrastructure tend to be relatively stable and predictable, and therefore lower risk. They do not suit high risk / high return investors. · While unlisted funds often move toward a listing, investors looking for immediate liquidity may find listed funds or direct investment in infrastructure equities more attractive. · Poor asset selection can lead to disappointing results. Investors should satisfy themselves that their fund manager is capable of superior asset selection and asset management when compared to both other funds and to direct investment. |
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Articles of the same Serie : 101 |
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Articles of the same Topic : Alternatives |
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