Infrastructure plays a vital role in our daily lives. It enables us to drive to work, take a shower, and stream our favorite shows or movies. In both the United States and the European Union, there are extensive plans to invest in infrastructure over the coming years to support a greener, more digital future. Many companies will benefit from these multi-billion-dollar investments, and as an investor, you can take advantage of this trend.
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Core vs. Value-add infrastructure funds
Because infrastructure investments typically require large amounts of capital, the most common way to invest is through private market funds, which generally fall into two categories: core infrastructure funds and value-add infrastructure funds. Core infrastructure funds invest in existing infrastructure companies or projects. For example, a fund might earn income from rent paid by a cloud provider using a data center. This provides a stable and predictable income stream.
Value-add infrastructure funds focus on direct investments in small to mid-sized companies, aiming to grow them through acquisitions and capital investment. For instance, a fund might help a fiber-optic company lay new cables. These funds expand the supply of infrastructure assets, which core funds may later invest in.
A key difference is that core strategies often involve higher levels of debt, justified by the long-term contracts and physical assets backing the investments. However, this makes them more sensitive to interest rate fluctuations. Value-add strategies typically rely more on equity financing.
"}},{"componentType":"sectionTitle","title":"Why Invest in Infrastructure?"},{"componentType":"paragraph","richBody":{"value":"Investing in infrastructure allows you to tap into several major global themes that will shape the coming years and decades. Cities continue to grow rapidly, and infrastructure must evolve accordingly. Significant investments are needed to develop more efficient housing concepts, accommodate growing populations, and support a healthier, more sustainable society. In addition, people are living longer, and populations in developed countries are aging. Infrastructure must adapt to this as well, with investments in hospitals, nursing homes, and transportation systems that meet diverse mobility needs.
Many roads and buildings were constructed decades ago and are now due for replacement or renovation.
The digitalization of the global economy shows no signs of slowing down. Continuous investment is required to expand high-speed internet access to more regions around the world. This also demands more data centers and supporting technologies.
Infrastructure investments also address climate change and can contribute to a more sustainable future. New forms of low-emission transportation are needed, along with initiatives to expand renewable energy sources. Think of wind and solar power, but also smart grids and battery storage solutions.
"}},{"componentType":"sectionTitle","title":"Benefits of Infrastructure Investing"},{"componentType":"paragraph","richBody":{"value":"Infrastructure investments are less sensitive to economic cycles, as roads, hospitals, and utility networks remain essential to society regardless of market conditions. Moreover, certain segments of the infrastructure sector, such as electricity and gas networks, are regulated and operate under long-term contracts. This results in more predictable cash flows, even during economic downturns, and often leads to a low correlation with equities and bonds.
Due to the substantial capital required, the infrastructure market is difficult for new entrants to access. This strengthens the competitive position of existing players. In some cases, there is even a natural monopoly, such as with hospitals or power plants, where building a competing infrastructure is simply not feasible.
Many infrastructure-related companies, including utilities and data center operators, are able to adjust their pricing in line with inflation. This means their revenues can rise with increasing prices, offering investors a degree of protection against inflation.
"}},{"componentType":"sectionTitle","title":"Risks"},{"componentType":"paragraph","richBody":{"value":"Investing in infrastructure is not without risk. In addition to general investment risks, there are specific risks tied to infrastructure assets. For example, the utilities sector is typically heavily regulated by governments. Changes in regulation can impact the profitability of a project. Political developments may also play a role. New government policies, tax increases, or even the nationalization of infrastructure companies can affect returns. This is particularly relevant in emerging markets, where political stability cannot always be taken for granted. Failure to comply with laws and regulations can result in significant fines or reputational damage.
Beyond operational risks, investors must also consider technical risks, such as design flaws or issues in asset management. Closely related are project risks, which are most prominent during the construction phase. These may include delays in project development or cost overruns.
Additional Risks
Investing in complex investment funds carries additional risks compared to non-complex funds. Instruments that provide access to Private Markets are typically illiquid or only partially liquid, and their risk profile often resembles that of a portfolio composed entirely of equities. Illiquidity means that these investments cannot be easily traded or sold. As a result, investors may not be able to exit their positions when desired. A sufficiently long investment horizon is essential for such illiquid assets. As with equity and bond funds, returns depend on the fund manager and the performance of the underlying investments. Private Markets investments are speculative and complex instruments that carry a high level of risk. Additional risks include higher leverage, limited transferability, reduced investor protection, less transparent valuation, and limited access to information compared to investments in public markets.
"}},{"componentType":"sectionTitle","title":"Conclusion"},{"componentType":"paragraph","richBody":{"value":"Infrastructure can be a valuable addition to an investment portfolio due to its low correlation with other asset classes, predictable cash flows, and its essential role in daily life. A more sustainable and digital future will require massive investments, from which many companies are expected to benefit. Investors can capitalize on this by investing in infrastructure funds. However, it is important to be aware of the specific risks that may affect the profitability of such projects. At the same time, one must recognize that investing in complex investment funds carries additional risks.
ING collaborates with Brookfield and Partners Group to make infrastructure investments accessible to Private Banking clients.
"}},{"componentType":"sectionTitle","title":"Disclaimer"},{"componentType":"paragraph","richBody":{"value":"Investing involves risks and costs. You may lose all, or part of your investment. Learn more about the risks of investing and how to limit them. Also, read the General Terms and Conditions for Investments. Curious how ING takes sustainability into account when making investment decisions? For more information about the ING Sustainable Investing policy, visit ing.nl/ESG .
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