PLANSPONSOR - February/March 2019 - 54

DB FOCUS
Systematic Income
Infrastructure stands firm despite the economics
I
nfrastructure is massive, yet small. It
comprises some of the largest and most
productive projects on Earth-such
as airports, highways, distribution networks
for water and power, pipelines for
the movement of oil and gas, and the traditional
and alternative generation of electricity.
Among U.S. institutional investors,
however, infrastructure is a small asset
class-typically under 5%. But it is getting
a tremendous amount of new attention,
thanks to its potential for generous cash
flows and returns that provide a diversifying
counterpoint to conventional equities.
Because modern civilization has
created so much infrastructure, the
definition, investment motivation and
goals are all over the map, so to speak.
" Infrastructure doesn't mean the same
expected risk and return to every pension
fund, " says Jan Mende, senior vice president
at consulting firm Callan Associates
in San Francisco; she also authored
Callan's " Infrastructure-No Longer a
Niche Option, " a comprehensive primer
on infrastructure investment. " Some
funds want the inflation protection and
cash yield as a complement to the lower
returns and risk of their real estate portfolio, "
she says. " Other pension funds
place infrastructure higher up on the riskreturn
curve, similar to private equity. "
Others see different motivations. " It's
less about a call on the level of returns and
more about clients realizing that historical
portfolio returns have been driven
by equity or credit beta, and wanting to
further diversify their portfolios, " says
Peter Rogers, Americas head of real assets
research, in the Chicago office of consultants
Willis Towers Watson.
Rogers explains that the economics
behind infrastructure are quite different
from those affecting most businesses:
" These assets provide services that are
essential to the functioning of a community,
and their demand is not much
affected by the economic situation. People
always need water, and children always
have to attend school. Infrastructure
54 PLANSPONSOR.com February - March 2019
Art by Suharu Ogawa
assets usually have significant monopolistic
supply characteristics and high
barriers to entry for competition. "
He adds, " That provides pricing
power, which should lead to more stable
returns and lower volatility versus traditional
equities. "
Infrastructure investment can be
parsed into several categories, according
to the point in an asset's development life
cycle, not unlike private real estate. Core
and core-plus assets are established, efficient
operations, with long-term contracts
and steady demand; their returns arise
primarily from operating income and
a possible component of gains in asset
prices. Value-added assets are operational
but require additional capital investment or
management expertise; near-term returns
are likely to come from capital appreciation.
Opportunistic projects are still in development
and require substantial capital investment;
their cash flow is as yet aspirational.
Like private real estate and private
equity, infrastructure investment is
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