Infrastructure investment is an alternative strategy that focuses on the physical structures and systems that keep societies operational. Examples of public infrastructure include: railways, highways, harbors, cell towers, school, and wastewater treatment facilities.
As a type of alternative investment, infrastructure is not correlated with traditional assets like stocks and bonds. As such it may provide portfolio diversification. Infrastructure investments come with specific risks, however.
Examining how infrastructure investments work and their pros and cons can help you determine if they might be right for you.
Key Points
• Infrastructure investments are in the physical structures, facilities, and systems that enable society to run smoothly.
• Examples of infrastructure sectors include transportation, energy, and telecommunications, and projects may include developing highways, wind farms, and fiber-optic cables.
• Infrastructure is considered an alternative asset class. Because it’s typically uncorrelated with traditional markets, it can offer portfolio diversification.
• Investors can access this asset class through municipal bonds, private investments, public-private partnerships, and infrastructure mutual funds or ETFs.
• Because infrastructure is a physical asset, it can be durable and may offer steady yields. Risks include lack of liquidity, potential vulnerability to higher interest rates, regulatory changes, natural disasters, and political events.
Defining Infrastructure Investment
Infrastructure investing refers to investment in the tangible assets that societies rely on to function, from power plants and parking lots to hospitals and schools. It’s an example of an alternative investment, since infrastructure investments are typically not correlated with traditional assets, such as stocks, bonds, and cash, or cash equivalents.
As a strategy, alternative investments offer the potential to generate higher risk-adjusted returns compared with traditional assets, though this typically comes with higher risk. Infrastructure investments are illiquid, and can be subject to interest rate fluctuations, regulatory changes, and risks owing to climate change and extreme weather.
Infrastructure investment funds, infrastructure stocks, and municipal bonds are some of the ways to invest in this alternative asset.
Types of Infrastructure Assets
Infrastructure assets are long-term capital assets that are used to provide public services. They’re most often stationary and typically have a long life or period of usefulness. Examples of infrastructure assets include:
• Roads, bridges, tunnels
• Water, sewer, and drainage systems
• Dams
• Municipal lighting
• Communications networks, cell towers
• Schools
• Healthcare facilities
• Prisons
Infrastructure assets are viewed separately from equipment used to construct critical structures. For example, a new road is an example of an infrastructure asset but the asphalt paving machine used to build it is not.
Public vs. Private Infrastructure Projects
Public infrastructure is available for public use and is funded through public means, such as municipal bonds. When you buy a municipal bond you’re agreeing to let the bond issuer, typically a city or local government, use your money to support public works projects for a certain period. In return, the bond issuer pays you interest, and at the end of the term, you can collect your original investment plus the interest.
Private infrastructure projects use capital from private investors to further the construction or improvement of critical structures. An infrastructure investment fund, for example, may concentrate private equity in a specific sector or subsector.
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Importance of Infrastructure Investment
Infrastructure investment is important for many reasons, starting with its impact on the economy. Without roads, railways, airlines, and waterways, people and goods can’t get where they need to go. Transportation infrastructure facilitates economic growth and reduces disruptions to the supply chain. Investing in utilities, such as electricity and water is also crucial.
Quality of life and basic needs are also dependent on infrastructure. When infrastructure is not maintained, societies risk losing access to safe, clean drinking water, communications, housing, and health care.
Infrastructure investment also serves as a line of defense against cyberattacks, which can threaten the security of everything from banking systems to the electrical grid. In short, investment in infrastructure makes life as we know it possible.
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Infrastructure Investment Sectors and Projects
Infrastructure investments can target a specific sector or type of project. Here’s a quick look at different areas of infrastructure investing.
Transportation Infrastructure
Transportation infrastructure refers to structures and systems that allow goods and people to move from one place to another. Examples of transportation infrastructure projects include the building or maintenance of:
• Canals that allow cargo ships to pass from one body of water to another
• Ports which allow cargo ships, cruise ships, and other maritime vehicles to dock for the purpose of loading or unloading people and goods
• Mass transit systems such as subways and buses that allow people to navigate around a large urban area without a car
• Roads, streets, and highways designed for different speeds and levels of capacity
In the U.S., the interstate highway system is one of the largest public works infrastructure projects ever undertaken.
Energy Infrastructure
Energy infrastructure includes all of the systems and structures that are necessary for generating or transmitting energy to a population. Here are some examples of energy infrastructure projects.
• Solar panel systems that provide power for street lamps along a highway
• Large-scale wind turbine farms that generate electric energy for a local population
• Battery energy storage systems that connect to the existing electrical grid
The Hoover Dam is an example of an energy infrastructure project. The dam was built through a combination of public and private funds, as the government focused on improving infrastructure to generate jobs amidst the Great Depression.
Telecommunications Infrastructure
Telecommunications infrastructure, or telecom, encompasses the various systems and structures people and businesses use to communicate. Telecom infrastructure includes:
• Telephone lines
• Fiber-optic cables
• Wireless networks
• Routers
• Cellular phones
Satellites are also an integral part of telecom infrastructure. Global governments and organizations, including NATO, rely on satellites to keep the lines of communication open.
Financing Infrastructure Investments
There are several ways infrastructure investments are financed. Capital may come from public investments and government programs, private investment, or infrastructure funds.
Public Funding and Government Initiatives
Public funding for infrastructure projects most often takes the form of bonds. Investors get the benefit of regular interest payments while the bond issuer is able to get the capital they need to invest in infrastructure.
Bonds are a form of direct investment in infrastructure; taxes are an indirect method. When you pay taxes at the local, state, or federal level, some of that money goes toward funding infrastructure projects. Governments use tax dollars, along with revenue collected from other sources, to build or improve infrastructure.
Private Investment and Public-Private Partnerships
Private investment provides financing for infrastructure projects through individual and institutional investors. When you invest in this type of fund, you may gain exposure to multiple infrastructure classes or just one — it all depends on the fund’s goals and objectives.
Public-private partnerships (PPPs) are arrangements in which private investors and governments work together to support infrastructure projects. PPPs can be used to address a variety of infrastructure needs, from building parks and recreation centers to constructing new roadways.5
Infrastructure Funds and Asset Management
Infrastructure funds allow investors to gain exposure to companies or industries that engage in infrastructure activities. For example, you might invest in a fund that holds companies in the shipping and ports sector or a fund that’s dedicated to investing in utilities.
Investing in infrastructure through mutual funds or exchange-traded funds (ETFs) allows for diversification. You can hold a collection of investments in a single basket, rather than purchasing shares of individual infrastructure stocks.
Infrastructure asset management refers to strategies for managing infrastructure assets. It encompasses key decision-making processes related to the maintenance of infrastructure systems, including risk management and cost management.
Advantages of Investing in Infrastructure
As discussed earlier, because infrastructure is an alternative asset class it’s not correlated with conventional assets like stocks and bonds. Thus, it can provide some portfolio diversification and may help mitigate volatility in other asset classes.
And because infrastructure is generally comprised of long-term physical assets that typically require a high initial investment, these structures tend to be durable. This contributes to lower ongoing investment expenses, and steady yields from population use (i.e., tolls, utility payments, transportation fees).
In that way, infrastructure can also be a resilient investment in the face of other sources of volatility. For example: what happens in the stock market generally won’t impact bridges and tunnels, or the long-term impacts could potentially trickle down in more predictable ways (material costs, interest rate changes) over time.
Risks and Challenges in Infrastructure Investing
Infrastructure investments are exposed to a variety of risks. As an investor, it’s important to understand what those risks can mean for your portfolio.
The most common risks and challenges include:
• Interest rate risk: This is the risk of interest rates rising or falling in a way that could impact bond rates, as well as the cost of loans for construction and development of certain projects.
• Regulatory risk: Because municipal structures depend on local regulations, changes in laws and policies can impact how quickly a project may ramp up, and whether new standards or guidelines will increase costs.
• Construction risk: Construction risk can be a problem if the builder of a project experiences delays, if there are structural impediments that cause significant delays, or if the builder walks away from the contract before the project is complete.
• Event risk: Infrastructure projects can face a wide range of potential threats from outside forces or actors, including the possibility of cyberattacks, supply chain attacks, and data breaches. Natural disasters, a changing climate, and geopolitical upheaval can also prove challenging for maintaining infrastructure.
The Takeaway
Infrastructure investing might be of interest to you if you’re looking for a way to expand your investments beyond stocks and bonds and diversify your portfolio. The most important thing to remember about alternative investments like infrastructure is that they may carry a higher degree of risk. It’s wise to weigh those risks against the potential returns or other benefits before wading in.
Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.
FAQ
What are some examples of infrastructure investments?
Examples of infrastructure investments include municipal bonds that are used to build or improve local roads, public-private partnerships that aim to build more green spaces, and energy sector ETFs.
How can individual investors participate in infrastructure investing?
Infrastructure stocks, mutual funds, ETFs, and municipal bonds may offer the easiest points of entry for investors. You could buy individual shares of stock in an infrastructure company, hold a collection of infrastructure investments in a single fund, or earn interest from muni bonds while helping to fund infrastructure projects.
What are the typical returns on infrastructure investments?
Infrastructure investments can generate returns that may be higher or lower than typical market returns, but it’s important to remember that infrastructure typically does not react to market volatility the same way as conventional assets might. Also some infrastructure investments can offer predictable yields versus other assets.
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