All about assets: infrastructure

Will Hodges starts this new series by introducing the sector that keeps economies running

What is infrastructure?

Infrastructure is the framework around which modern societies are constructed. For an economy to function efficiently, it needs a solid network of transport links, terminals for imports and exports, energy providers and a host of other amenities including sanitation, waterworks, and communication links. Historically, Europe and America have led the way in infrastructure investment, with Britain's roads, railways and ports providing the base for the world's first industrial revolution in the early 19th century. More recently, growth in infrastructure investment has been seen in developing economies such as China and India.

What's all the fuss about?

Infrastructure has become one of hottest areas of financial investment in recent years, with much of the excitement coming from the rapid urbanisation and industrialisation of emerging markets across Asia, South America and Africa. Government investment in new road, railways and ports has provided the backbone for these countries' formidable economic progress in recent years. However, with considerable development needed over the coming decades, states are increasingly turning to private investors as a source of financing.

Who invests in infrastructure?

Private investors are able to come on board in public infrastructure projects in a variety of ways. Companies with expertise in areas such as construction and engineering are often invited to advise on or help finance public infrastructure projects in partnership with the state under the public-private partnership (PPP) model. In return, the private investor is able to reap income in the form of tax revenues or charges to public users over a fixed time period.

Alternatively, non-specialist investors (for example, a general hedge fund) can gain exposure to the sector in the form of a specialist infrastructure fund. Typically, such a fund will invest in a selection of different infrastructure-focused companies across different sub-sectors. Additionally, a fund may have a developed or non-developed world focus, or invest in both. One of the most successful funds in recent years has been Goldman Sachs' infrastructure fund, which has about $10 billion (£6.5 billion) under management.

What are the advantages of investing in infrastructure?

Infrastructure is undoubtedly one of the boom areas within the global economy at present and offers a wide variety of opportunities for profitable investment. Many developing states have suffered from a chronic lack of infrastructure investment in previous decades which is only now starting to be addressed. In India alone $1 trillion worth of investment is projected to be needed between 2012 and 2017, with the private sector expected to be a major source of financing. In Brazil, private investors are being courted by President Dilma Rousseff's centre-left government in a bid to address deficits in the nation's funding of road, port and railway maintenance and development.

Infrastructure assets offer a steady, long-term income allowing funds and companies a reliable, if unspectacular, return on their investment. A railway, for example, is a relatively durable asset and may offer good profits over several decades.

What are the disadvantages of investing in infrastructure?

Infrastructure is generally considered to be an extremely illiquid asset, meaning turning a stake in a road or port into cash is often a lengthy and extremely bureaucratic process. A company with much of its funds tied up in infrastructure assets may therefore find itself unable to access money quickly if it runs into cashflow problems.

With infrastructure development largely overseen by the government in most states, investors may also be exposed to high levels of political risk. In Venezuela, for example, foreign investors have seen shipping and oil production assets repatriated by the Chávez administration. While in other developing states such as India, infrastructure investors can face red tape and corruption, adding significant delays and costs to projects.

Where could I fit in?

The importance of infrastructure to economic growth in both the developed and developing worlds means that it's relatively easy for graduates to gain exposure to this vital and exciting asset class. The financial sector has assumed an increasingly important role as a funder of infrastructure projects.

Graduates working for a major asset manager may be able to work on an infrastructure fund, analysing the credentials of different infrastructure companies as well as the surrounding economic and political environment. Investment banks also work closely with infrastructure assets, providing assistance to companies in the form of debt, M&A advice, and other financial services. Most banks have roles available to graduates which involve extensive analysis of companies in the field and the sector in general.

Lawyers also play a key role in transactions involving infrastructure assets. Trainees and junior associates can help set up the legal agreements in this area which allow infrastructure projects to be successfully completed and run, which often involves doing research into companies in the sector, technical background, relevant law, and political risk issues.

Graduates in disciplines such as engineering and geology may be able to gain a more hands-on exposure to the sector. The larger engineering and energy firms run graduate schemes and often offer employees the chance to work directly on projects overseas.

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