Bridge over the River Yalu, which separates China (to the left) and North Korea (to the right) at Dandong.Sean Gallagher Photography
The super rich are fast realizing that bets on bridges and wind mills can provide steady long-term returns and offer them an alternative that's safer than equity and often more exciting than government bonds.
Infrastructure has long been the domain of institutional players but has now emerged as a mainstream alternative for wealthy investors burnt in the credit crunch by a related asset class, real estate.
A vote of confidence in the sector came recently from no less an investor than Warren Buffett, who bought out rail group Burlington Northern for around $26-billion (U.S.).
"The trend of seeing private clients invest directly into infrastructure assets is just starting to emerge," said Kurt Reiman, a researcher at UBS's wealth management division, adding that after the financial crisis, investors were intrigued by such investments.
The target returns from infrastructure, ranging up to 12 per cent for listed funds, and averaging 18 per cent for unlisted, private-equity type investments, may seem unattractive in the context of a bullish equity market.
But they are more than adequate at a time when quality government bonds, a traditional magnet for wealthy investors, offer near zero returns.
"The returns depend on when you enter the transaction," said Michael Barben, head of private infrastructure at Partners Group. "If the asset is fully mature, you may expect 7 to 9 per cent in a developed country, if it needs to be developed, upgraded or expanded, returns can be significantly higher."
Solid Returns
The recent financial downturn also demonstrated the robustness of infrastructure: in the last five years, listed infrastructure indexes have risen more than most other asset classes with the exception of emerging market equities.
Savvy individuals with deep pockets can now go head-to-head with institutional investors in negotiating tickets in major unlisted infrastructure funds, or funds of funds.
A major appeal of infrastructure is as a hedge against inflation, as cashflows are inflation-linked, said Mr. Barben.
Infrastructure assets are also notoriously illiquid, and so investors have to decide if they opt for unlisted funds, where asset values are more stable but involve long lock-up periods, or listed infrastructure, where participations can be traded.
Some rich individuals can also turn to infrastructure for the moral satisfaction of promoting a country's infrastructure, or building up their social or environmental credentials.
Robin Bonnerjee at Sares Invest, an investment management firm which has about two-thirds of its clients investing in infrastructure, said the super-rich often do not consider return on investment to be the sole criterion for their portfolio.
"When I explained to my clients some of the investment opportunities in Indian infrastructure, some of them had been in that country and had encountered themselves the problems that exist there," said Mr. Bonnerjee.
Direct Investing
Although there are examples of rich individuals who have the money, know-how and connections to develop projects on their own, industry experts say this is the exception rather than the rule.
"These investors are more commonly found investing through family offices or other intermediaries," said Tony Rocker, head of KPMG's alternative investment group.
In Europe, the renewable energy sector has traditionally attracted family offices of ultra high-net worth individuals, particularly in countries where government subsidies and feed-in tariffs offer such windows of investment.
At the peak of Spain's solar energy project bonanza, driven by generous subsidies, many banks also saw an opportunity to develop and buy projects and then offer them to clients through their wealth management units.
Fund managers are also looking to bridge the gap between the huge institutional investors and rich individuals, and make investment opportunities in infrastructure more accessible.
Gravis Capital Partners (GCP) is a new UK infrastructure fund with a minimum subscription of £25,000 that offers an annual fixed rate of return of 8 per cent net of costs and fees. Such entry level is attractive for those with smaller fortunes.
More fund structures accommodating rich individuals are expected to emerge as infrastructure gains in prominence as an asset class.
"We are right in the middle of it, it's happening now," said UBS's Mr. Reiman.