What is Infrastructure Investing?
How do you define an infrastructure investment?
What are the essential elements you should know!
In this article, I will break down the notion of Infrastructure Investing so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let’s discuss what is an infrastructure investment and why it’s so important!
Are you ready?
Let’s get started!
What Is Infrastructure Investing
Infrastructure investing is the process of investing in real assets necessary to allow us to live in a society such as highways, roads, railways, tunnels, airports, water supply, electrical grid, bridges, energy, Internet connectivity, and so on.
For a country to develop and prosper, it needs to build the infrastructure needed by its residents to be able to exchange, produce, and live in society.
As a result, infrastructure is a critical aspect of the overall development of a country.
Infrastructure investments in general are attractive to infrastructure investors as they are more predictable and offer a more steady cash flow.
Infrastructure assets require the investment of large sums of money.
In some cases, the government, government entities, or bodies will be the sole investors in an infrastructure asset but in other cases they will need to work with the private sector to raise the capital needed to execute the project.
As such, infrastructure investing has become an attractive type of investing option for investors looking to diversify their portfolio and invest in a type of investment that may offer a steady cash flow and be non-cyclical.
In a nutshell, investing in infrastructure is a type of investment where the investor is looking to finance infrastructure assets.
To better understand the notion of infrastructure investing, what does infrastructure mean in the first place?
According to Investopedia, infrastructure is defined as follows:
The term infrastructure first appeared in usage in the late 1880s. The word comes from French, with infra- meaning “below” and structure meaning “building.” Infrastructure is the foundation upon which the structure of the economy is built, often times quite literally.
As you can see, the term infrastructure assets represent the foundation upon which an economy is built.
Types of Infrastructure
You can have can three types of infrastructure in an economy:
- Soft infrastructure
- Hard infrastructure
- Critical infrastructure
The soft infrastructure refers to the various institutions that provide services to the population.
The soft infrastructure requires human capital and expertise, such as the financial system, law enforcement, education system, healthcare, or other services offered to society.
Hard infrastructure refers to various types of infrastructure assets, such as:
- Oil rigs
The hard infrastructure refers to the actual asset and what may be needed to operate the asset.
Then you have the critical infrastructure.
Critical infrastructure is a type of asset that is essential to maintain the economy, such as:
- Healthcare system
- Emergency system
- Energy system
- Transportation system
- Homeland security
These are types of infrastructure assets that offer the most essential needs required for society to live and thrive.
Infrastructure Investing Definition
According to the Corporate Finance Institute, infrastructure investments are defined as follows:
Infrastructure investments are a form of “real assets,” which contain physical assets we see in everyday life like bridges, roads, highways, sewage systems, or energy.
As a result, infrastructure investing means:
- To invest in real assets
- Such as bridges
- Sewage systems
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Infrastructure Investment Characteristics
What are the characteristics of infrastructural investing?
The reason why many investors tend to invest in infrastructure is that they offer various financial benefits and represent stable investments.
Here are some of the key features of an infrastructural investment:
- It offers a steady cash flow
- It is non-cyclical
- It offers low variable costs
- It allows for a high leverage
The first feature is that an infra investment has the potential to provide investors with a steady cash flow.
Investors who are looking to earn a passive income or generate revenue from their investment will have a preference for “infrastructure” investments.
The second important feature of investing in infrastructure is that the investment in question will typically not be impacted by economic cycles such as recessions and expansions.
It will not be likely for the government to go bankrupt and no longer be able to manage the roads, bridges and other types of infrastructure.
An investment in infrastructure is seen as beneficial as it allows can also provide a low variable cost for the use of the infrastructure.
Last, since private infrastructure investments or the public sector offer a steady cash predictable cash flow, it’s possible for the project to be highly leveraged.
This perhaps is one aspect that may be less desirable as interest costs can be very high if the project is highly leveraged.
However, if the project is well-managed, then a high level of debt can be taken without adversely impacting the overall return offered to the infrastructure investors.
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Infrastructure Investing Risks
What are the risks of infrastructure investing?
Since infrastructure assets are those built to allow for the social and economic growth of a region, state, or country, there are risks that investors must acknowledge and be aware of.
The first important risk of an infrastructure invest is overleverage.
Since infrastructure assets can offer a steady, predictable, and continuous cash flow, it may be possible to take on debt to finance the project as you know how much you can afford to pay in interest cost and remain profitable.
However, the more debt you take, the more you eat into the profitability of the infrastructure project and may end up having to pay back the debt for many years to come.
The second most important risk to consider as an investor is the environmental, social, and governance risk (also called the ESG risk).
There are many large infrastructural projects that can result in pollution or other hazards to the residents, community, or neighboring areas.
Also, it’s possible that the infrastructure in question causes other types of economic disruptions affecting the community in the short, medium, or long term.
The third aspect relates to political risk.
Since you are dealing with assets built to support social and economic actors in society, you may have important political pressures or oppositions that can affect the viability and profitability of the investment.
The political landscape can change over the life of a project resulting in changing laws, requirements, and expectations (that can be either neutral, positive, or negative for your investment).
Infrastructure Development Stages
What are the different types of infrastructure investments based on their developmental stage?
In essence, you have three types of infrastructure development stage:
- Greenfield projects in early stage
- Greenfield projects in late stage
- Brownfield assets
A greenfield early stage is a type of project that is intended to be carried out where the developers have made certain plays for the execution of the project.
Since the project is in its early stage, an early stage greenfield offers investors the highest level of risk as there may be many variables that can affect the feasibility and viability of the project, such as regulatory approvals, construction cost, and so on.
A greenfield late stage is a type of infrastructure project where the plans are all completed and various approvals have been obtained from different regulators and stakeholders.
A late stage greenfield is therefore a type of project that has the necessary viability to move forward but remains exposed to construction risk and capital expenditure overruns that can hurt the planned profitability of the project.
A brownfield asset is an infrastructure that has been built and is in operation.
Brownfields offer less risk than greenfields as they are assets already built and potentially generating revenues.
Infrastructure Investment Takeaways
So there you have it folks!
What is infrastructure investment?
Infrastructure investing is a fast-growing investment class that is now a segment worth over $100 billion.
Many investors, professionals, and investing amateurs are getting onto the infrastructure investment bandwagon as with aging infrastructure assets in our economy and the cash constraints that governments need to deal with, more and more inventors are considering investing in infrastructure.
To invest in infrastructure is to invest in a type of asset that is intended to benefit society, the economy, and allow the community, town, city, state, or nation to grow.
Infrastructure investments can be made in:
- The transportation system
- The healthcare system
- The agricultural system
- The energy system
- The financial system
- Homeland security
- Law enforcement
The list can be quite long.
Over the next years and decades, I believe that the infrastructure investment segment will continue to grow to offer investors the opportunity to invest in potentially stable and profitable assets.
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Now, let’s look at a summary of our findings.
Invest In Infrastructure Overview
If you enjoyed this article on Infrastructure Investing, I recommend you look into the following terms and concepts. Enjoy!
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