Clear distinction
So what are the pros and cons of investing in listed infrastructure?
“Investors do need to make a clear distinction between investing in actual operational infrastructure projects (typically through a listed investment company) such as toll roads, hospitals, prisons and schools on the one hand and buying the shares of stock listed companies involved in infrastructure, such as power companies and owners of airports or roads,” he notes.
“The former provides access to very long-term contracts (often in the form of public/private sector partnerships), with stable income streams and usually with a high degree of inflation proofing built into their contracts.
“In contrast infrastructure equities – and funds which invest in them – are ultimately global thematic equity funds, with equity market risk and volatility. The latter do not, therefore, provide the same diversification benefits as actual projects, nor do they generate high levels of income yield.”
Mr Meany observes that while unlisted infrastructure has smoother reported returns, giving it lower volatility and a lower correlation to equity market returns, it does come with execution, monitoring and valuation risks.
“Listed infrastructure has market risk but offers liquidity, diversification and relative value,” he points out. “This has led some investors to use listed as a liquid complement to unlisted infrastructure allocations, as it enables them to easily adjust a portfolio’s overall infrastructure exposure at the margins.”
There are practical differences between a minority investment position in a listed security and ownership of unlisted assets, with advantages and disadvantages for both, according to Nick Langley, co-chief executive officer and co-chief investment officer at RARE Infrastructure, a Legg Mason affiliate.
“With unlisted infrastructure, an investor may be able to exert a material level of control over the management of the infrastructure asset, and the opportunity set is wider – unlisted infrastructure assets include social infrastructure assets which are not typically found in the listed infrastructure market, such as hospitals, prisons, and schools.
“However, listed infrastructure has a deeper opportunity set – there are significantly more infrastructure companies to invest in globally then there are unlisted infrastructure projects – greater liquidity (resulting in a more flexible approach to entering and existing investments), and typically lower fees,” he points out.
Legg Mason Asset Management, in its report 'The Infrastructure Growth Story', sums up the pros of listed infrastructure:
- Opportunity set is deeper (more companies within subsectors).
- Listed infrastructure incurs equity-like market volatility in the short term, but over the longer term the true infrastructure asset return prevails.
- Flexibility to take advantages of market opportunities – market mispricing allows for excess returns.
- Greater liquidity.
- Lower fees than unlisted infrastructure.
Its list of the pros of investing in unlisted infrastructure is slightly shorter:
- Opportunity set is wider (additional subsectors to invest in).
- Unlisted infrastructure investors may have a degree of control over the asset (over capital structure and business development).
- Significant capital raising in the unlisted world has led to the bidding up of prices, impacting longer term returns.
Wary of headwinds
Investing via the listed market provides the flexibility to enhance returns over time.
