Insatiable for infrastructure

Another week, another successful investment company fund-raising in the infrastructure sector. VH Global Sustainable Energy Opportunities Trust, which has picked up more than £240m, is just the latest in a series of funds to tap into seemingly insatiable investor appetite for infrastructure assets.

That appetite is driven by several factors. One is that infrastructure has the potential to generate a steady stream of income, which is in short supply elsewhere in this low interest rate environment. Another is that real assets offer attractive diversification benefits at a time when uncertainty and unpredictability remain elevated in equity and fixed-income markets.

But there is a broader story here too. Infrastructure investment offers a play on the way the world is changing around us – and the way in which that change has been accelerated by the Covid-19 crisis.

The VH Global fund is a case in point. It will invest in a diversified portfolio of global sustainable energy infrastructure assets – the solar, wind and hydro-electric assets that will enable the world to transition away from an energy system that is dependent on fossil fuels.

Could there be more of a sure thing? As policymakers around the world strive to meet the commitments they made in the Paris Agreement on climate change, they have no choice but to move towards more sustainable sources of power. And even without those legally-binding commitments, governments know this is what their populations increasingly want – all the more so now in a world where the fragility of society has been exposed by a devastating pandemic.

Other areas of the infrastructure sector are seeing an even more direct positive impact in the context of Covid-19. In particular, the pandemic has supercharged the digitalisation of the global economy, from the dramatic move online in the retail sector to the remote working phenomenon. But to sustain that pace of digitalisation requires heavy investment in broadband capabilities, in 5G telecoms networks and in assets such as data centres. Here too, infrastructure funds are stepping up.

Social infrastructure is another interesting example of how the industry is expanding its reach to meet societal need. Healthcare and education facilities, social housing and the infrastructure required for civic services all provide opportunities for infrastructure investors – and a means with which to fund the support networks that ensure societies function effectively. Again, that imperative has never been clearer than it is right now.

For many years, policymakers found it difficult to persuade institutional investors and asset managers to fund many areas of infrastructure. In the UK, for example, generations of politicians have talked about unlocking capital for investment by persuading pension funds of the asset class’s attractions, without ever really making significant progress. In more recent times, specialist infrastructure funds have emerged, and the sector’s rapid growth is to be welcomed, given the need for this investment.

However, retail investors have not typically been perceived as an intrinsic part of the funding ecosystem for infrastructure. Infrastructure assets are large and unwieldy, illiquid, and require long-term commitment. Individual investors who wanted to do their bit in building the infrastructure of the future – and to share in the attractive returns on offer – have not always found it easy to do so.

This is why it is such good news that the number of infrastructure-focused investment companies continues to grow. As in other illiquid asset classes, investment companies provide investors with a liquid option for investment – a chance to benefit from what infrastructure has to offer, and to play a small part in funding the rebuilding of the world.

None of which is to suggest performance is guaranteed. Individual fund managers will need to pick the right projects and to manage their assets carefully. Infrastructure investment requires specialist skills and experience. Nevertheless, investment companies offer retail investors an opportunity to participate in an asset class that would otherwise be off-limits.