Investments in infrastructure offer stable and predictable cash flows. That’s what institutional investors like for their asset-liability-matching, Mirjam Staub-Bisang writes in her exclusive essay for finews.first.
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Cities grow quickly. Each year, around 75 million people settle in urban areas, mostly in the rapidly growing emerging economies across Asia, Africa and Latin America. Today, 3.4 billion people live in cities; by 2030, this number will have risen to five billion – or about 60 percent of the global population.
In 1950, New York was the world’s only megacity with more than 10 million inhabitants; by 1990, there were already ten of them. Today, the number has nearly tripled to 28 megacities globally, with China alone counting six of those.
This dramatic development presents major challenges for the environment and society at large. Cities produce close to 70 percent of global greenhouse gas emissions and in many cities the strain on infrastructure, including water, electricity and food supply, sewage and transportation, has become unbearable. This results in a miserable quality of life for many.
«The solutions developed for sustainable urbanisation offer great opportunities»
In contrast, some of today’s most liveable large cities, such as Singapore or San Francisco protect their natural ecosystem by increasing resource and energy efficiency, hence conserving healthy and sustainable living conditions for decades to come.
The solution approaches developed for sustainable urbanisation offer great opportunities for investors. Driven by high demand, companies that provide products and services related to the efficient use of natural resources, such as clean water, air or energy - China alone invests more than $150 billion annually to fight air pollution - have seen tremendous growth.
The Swiss multinational Geberit, for example, markets its water-efficient sanitary and piping systems globally, and has compensated investors with an annual total return of 20 percent on average over the past 15 years.
Or Umicore, formerly active in copper mining in the Belgian Congo, has developed into a global materials technology and recycling corporation, leading in the recovery of copper and (precious) metals from electronic scrap.
«Private investors take advantage of attractive investment opportunities»
Urbanisation is a key driver of infrastructure spending. According to OECD estimates, investments of 2,5 to 3,5 trillion or about 3,5 percent of global gross domestic product (GDP) will be needed to maintain and build key infrastructure facilities globally in line with requirements, of which two trillion per year alone for urban infrastructure.
Due to public-sector budget constraints, private investors step in and take advantage of attractive investment opportunities in roads, ports, renewable power plants, gas pipelines or telecommunication assets.
«Institutional investors like the resulting predictable cash flows»
Many infrastructure assets offer inherent inflation protection due to regulation, concession agreements, contracts, or pricing power based on a strong strategic position. Coupled with high investment costs for the construction of the assets a (quasi-)monopolistic market position results which supports resilience in economic downturns.
Institutional investors such as pension funds and insurance companies find the resulting stable and predictable - and often inherently inflation-protected – cash flow useful for asset-liability-matching and for portfolio diversification, since they correlate very little with other asset classes.
The latter, however, is limited to investments in private, unlisted infrastructure companies and funds, which are generally illiquid and only restrictedly fungible. Hence, they require profound due diligence prior to investing. Yet, they may eventually compensate investors with stable single-digit to low-teen returns, depending on the chosen risk profile of the investment.
«Globally, pension funds finance over one third of infrastructure investments»
Listed infrastructure investments such as stocks or equity funds tend to be fairly liquid but also volatile and correlate highly with equity markets. However, they provide investors with immediate and globally diversified exposure to the asset class with relatively small investment volumes.
Globally, pension funds finance over one-third of infrastructure investments, a further 10 percent is provided by insurance companies. Australian and Canadian pension funds allocate about 15 percent of their capital to infrastructure; their European peers lag with an allocation of below 5 percent.
«This represents an important opportunity for investors»
Institutional investors prefer to access the asset class either by directly investing in infrastructure projects or via private (equity) funds. The investable assets determine the investment approach to a large extent, as the diversification requirements for pension fund and insurance assets imply investments across sectors and regions.
The fact that approximately 75 percent of the infrastructure that will be in place in 2050 does not exist today, represents an important opportunity for investors.
By financing sustainable infrastructure projects which use natural resources efficiently and are built future-proofed against climate hazards, such as floods or rising water levels and can be adapted flexibly to changing demographics, they profit from an improved risk-return profile while making a significant contribution to a climate-friendly, low-carbon and hence sustainable economy.
Mirjam Staub-Bisang is the co-founder and CEO of Independent Capital Group, an asset manager for institutional and private clients, with a focus on sustainable securities and real estate. The lawyer is a board member of Bellevue Group, of INSEAD in Fontainebleau/Singapore and a member of the council of Profond Sammelstiftung. Staub-Bisang studied at the University of Zurich and acquired an MBA at INSEAD in Fontainebleau.
She's the author of books on sustainable investment and infrastructure. Her latest book is «Infrastructure as an Asset Class», published by Wiley & Sons. It will also be published in Chinese shortly. Staub-Bisang was named a «Young Global Leader» by the World Economic Forum (WEF) in 2009.
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