What is infrastructure investing?

Infrastructure is an asset class that emerged in the mid-1990s and has continued to gain greater acceptance from institutional investors over time. The market is now over US$100 billion strong in terms of capital raised per year, with more than 100 funds closed annually.1 Infrastructure is typically considered in a portfolio context alongside other private markets asset classes, such as private equity and real estate. However, infrastructure investments share certain attributes that make them unique and are meant to provide steady, reliable returns across a wide variety of economic conditions. Returns are generally inclusive of a cash yield, which is beneficial for investors who seek income as well as total return.

  • Infrastructure is defined as the basic physical and organizational structures needed for the operation of a society or enterprise. Traditional infrastructure subsectors include social infrastructure (schools, hospitals, etc., typically built under public-private partnership frameworks), utilities (gas, water/waste and electricity networks), transportation (toll roads, airports and seaports) and energy infrastructure (power generation and midstream assets, such as pipelines).

  • $1.4 US


    Estimated sum the
    infrastructure bill could add to
    US economy in next 8 years

More recently, newer subsectors within infrastructure, such as digital infrastructure (telecommunications towers, data centers and fiber optic networks) and energy transition infrastructure (renewable energy but also energy storage/ efficiency), have become more mainstream. The assetclass continues to evolve, with certain logistics assets (such as food supply chains/cold storage, heavy goods vehicle trailers and short-line rail assets), healthcare and education businesses (for example, private hospitals and elderly care homes) and infrastructure services businesses (such as industrial equipment leasing) also increasingly featuring within portfolios

"Infrastructure is typically considered in a portfolio context alongside other private markets asset classes, such as private equity and realestate."

Infrastructure Risk and Return Categories

Infrastructure equity investing is typically divided into four main risk categories: core, core plus, value add and opportunistic. These are commonly accepted classifications used by investors to assist in portfolio construction and ensure appropriate diversification when allocating to the asset class. However, these classifications are also affected by factors such as an asset's development stage (that is, brownfield or greenfield2) and geography (that is, developed or emerging market), amongothers.

  • Core infrastructure

    This is considered the most stable form of infrastructureequity investing, as these assets tend to be the most essential to society or otherwise largely de-risked (that is, brownfield in nature). Returns are generally derived from income with limited upside through capital gains, and assets are commonly held for the longer term (more than seven years).Revenues and cash flow are generally governed by either rate regulation, availability agreements(which provide for the payment of revenue as long as a facility is able to operate) or long-term contracts with highly creditworthy counterparties,such as governments, municipalities andtop-tier industrialcompanies

  • Core-plus infrastructure

    These assets have some similarities with core infrastructure; however, there is generally more variability associated with the cash flows of core-plus assets. Income is still a component of overall returns, but there is also scope for greater capital appreciation. The holding period for core- plus assets is typically more than six years. Core-plus infrastructure still primarily consists of brownfield assets. These assets are typically less monopolistic than core infrastructure and may include a growth/GDP- linked component or some other form of asset or contract optimization.

  • Value-add infrastructure

    These investments typically include less monopolistic assets, assets that have a material growth, expansion or repositioning orientation, and certain greenfield assets. The holding period for value-add infrastructure is generally shorter than for core-plus infrastructure and typically ranges from five to seven years. Returns are primarily from capital appreciation rather than ongoing income.

  • Opportunistic infrastructure

    These assets that have the highest degree of risk but also return potential. Assets can include those in development, those located in emerging markets, those subject to a high degree of volumetric or commodity price exposure, or those under financial distress and in need of significant repositioning. In general, opportunistic infrastructure assets share many characteristics with private equity investments. Holding periods typically range from three to five years, and returns are almost entirely from capital appreciation.

Infrastructure investment
Characteristics by risk profile


Typical subsectors
· Gas, electric, water/waste and multi-utilities
· Contracted andrenewable power generation
· PPPassets
· Mature, top-tier airports, seaports or toll roads in major markets

Typical revenue drivers
· Rateregulation
· Long-term contracts with governments or creditworthy counterparties (suchas quasi-governmentalentities)
· Availability concessions with governmentagencies

Manager net IRR targets : 6% ~ 9%
Yield expectation : 5% ~ 7%
Implied capital gain expectation : 1% ~ 2%
Holding period (years) : 7+

Core plus

Typical subsectors
· Contracted thermalpower generation
· Contracted renewablepower generation with some development risk
· Contracted oil andgas midstreamassets
· Toll roads, airports, seaports with greater GDPsensitivity

Typical revenue drivers
· Long-termcontracts
· Concession arrangements subject to some volumetric/ GDP-linked risk

Manager net IRR targets : 9% ~ 12%
Yield expectation : 4% ~ 6%
Implied capital gain expectation : 5% ~ 6%
Holding period (years) : 6+

Value add

Typical subsectors
· Greenfield assets under construction (de-risked tocore plus oncecommissioned)
· Early stage oil and gasmidstream
· Data centers and fiberoptic networks
· Assets undergoing meaningful expansion
· Assets undergoing meaningful repositioning

Typical revenue drivers
· Long-term contractson greenfieldassets
· Short-termcontracts
· Contracts with less creditworthycounterparties
· Revenues reliant on meaningful ramp-upthrough GDP or demographicgrowth

Manager net IRR targets : 12% ~ 15%
Yield expectation : 2% ~ 3%
Implied capital gain expectation : 10% ~ 12%
Holding period (years) : 5-7


Typical subsectors
· Infrastructure assets in developingmarkets
· Special situations, such as assets undergoing transition or financial distress
· Merchant powergeneration
· Merchant oil and gas midstream processingassets

Typical revenue drivers
· Traditional revenueprofile but with meaningful exposure to both volume and pricingrisk
· Likelihood ofrevenue volatility

Manager net IRR targets : 15%
Yield expectation : 0%
Implied capital gain expectation : 15%+
Holding period (years) : 3-5

Environmental, Social
and Governance (ESG) considerations

ESG is an important topic within infrastructure. Many infrastructure assets have a large environmental footprint, and most, if not all, have a direct social impact on the stakeholders within theregions in which they are located. Governance is also important, considering that holding structures may be complicated and many assets have concessions, contracts or agreements with governmententities. Accordingly, we view ESG as a critical issue that all infrastructure managers should address to execute their investment strategiessuccessfully.
In short, we believe ESG is a critical component of infrastructure investing, and it's something we carefully consider when performing due diligence on private markets investmentmanagers.

  • When contemplating investing in a US infrastructure project,
    how important are ESG considerations?

    Very unimportant
    Somewhat important
    Somewhat unimportant
    Very unimportant
  • When contemplating investing in a US infrastructure project,
    how important are ESG considerations in comparison to
    investing in a project in an emerging jurisdiction?

    More important
    About the same
    Less important
  • The focus has to shift from
    highway development and
    move on to the more
    future-ready sectors

Is your organization making any of the following changes to
accommodate climate change and weather risk in the US?

  • Only investing in states and territories where disaster recovery and protecting against the effects of climate change are a priority
    Our business model has not changed
    Focusing on innovation and technological advancement
    Only investing in states and territories where these factors are a low risk

Is your organization's infrastructure planning changing to
accommodate climate change and weather risk in the US
in either or both of the following ways?

In which US states and territories do you plan to invest in
infrastructure over the next year?

In which US infrastructure sectors do you plan to invest in 2022?

  • Roads, tunnels, bridges


  • Social (educational. healthcare, aged care)


  • Energy transmission and distribution


  • Water (supply and treatment)


  • Telecommunications


  • Ports and marine


  • Airports/Aviation


  • Waste treatment and recycling


  • Rail (passenger)


  • Rail (freight)


  • Solar (CSP/PV)


  • Offshore wind


  • Other renewable energy (biomass, etc.)


  • Digital-Towers


  • Fossil fuels (e.g., coal and gas)


  • Digital - Date centers


  • Carbon-capture, utilization or storage


  • Digital - Fiber to homes


  • Other transit


  • Onshore wind


  • Altermative fuel distribution


  • Battery storage


  • Gray hydrogen


  • Clean hydrogen (green/blue/pink)


  • EV charging infrastructure


  • Pipelines


  • Nuclear


  • Other storage


Potential Risks to Consider

Although there are several potential benefits associated with investing in infrastructure within a traditional portfolio, there are still certain risks that investors should consider. The below list is not exhaustive; however, we believe it includes some of the most pertinent risks associated with infrastructure investing.

  • 01

    Liquidity risk

    Private markets infrastructure investments are considered to be illiquid and may not be saleable at the time an investor had originally planned for exit. Having a long-term investment strategy and maintaining appropriate levels of liquidity on a total portfolio basis are methods that can be used to manage illiquidity risk at the total portfolio level.

  • 02

    Vintage year risk

    Returns for closed-end infrastructure funds may vary due to vintage-year effects of investing and divesting assets across various economic environments. Investors can diversify against vintage-year risk by building out a portfolio over a three- to five-year period, which will allow the portfolio to be constructed throughout various points in an economic cycle.

  • 03

    Blind pool risk

    Investors allocating to closed-end private markets infrastructure investments allocate to 밷lind pools?in which the manager has full discretion to build out the portfolio. There is a risk that the investment manager may construct a portfolio differently from how the strategy was marketed.

  • 04

    Environmental risk

    Many infrastructure investments, such as oil and gas midstream assets or conventional power generation, have environmental footprints that must be managed. Failure to do so may result in some combination of land, water or air contamination. The costs associated with an environmental breach include not only remediation but also potential fines and future operating restrictions. There is also the risk of future regulatory changes negatively affecting the conventional power sector.

  • 05

    Legal compliance and regulatory risk

    Infrastructure assets are subject to numerous laws, statutes and regulations. Compliance failures can result in fines, restrictions, increased scrutiny and, at the most extreme, a revocation of the license to operate an infrastructure asset. It is also possible that future laws and regulations may change, which is a risk for which investors need to be prepared.

  • 06

    Operating and technical risk

    Infrastructure investments are often complicated assets or businesses that have unique characteristics. Operating risk is concerned with a business not functioning in an efficient manner. Technical risk is concerned with a design flaw or inadequate resource assessment that can impair an asset's overall ability to operate as intended.

This primer provides an overview of the characteristics of private markets infrastructure, which we believe is an asset class that offers a compelling blend of risk and return characteristics to investors seeking to diversify and enhance portfolios. Please contact your Genesis representative to discuss this primer further and for assistance in developing an infrastructure investment program.

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