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The Gray Area of Impact and Infrastructure Investing

September 9, 2019

Infrastructure investing is a unique asset class that has recently gained cachet as investors search for long term stable returns or yield greater than treasury bonds that provide inflation protection. Over the last two to three years, the overall growth of private infrastructure investing has grown tremendously; more than $1.7 trillion has been invested in infrastructure assets globally. Fundraising of infrastructure funds has raised more than $200 billion since 2006. Due to infrastructure investments outperforming stock and bond markets, we are going to see even more capital flood the space.

bridge What are infrastructure assets? Core infrastructure assets typically consist of roads, bridges, tunnels, ports, airports, water distribution, and power generation. These are physical assets with economic lives of 25- 50 years. Over the years the investment strategies and types of assets have expanded in into gray areas of investing beyond the traditional “boring” infrastructure assets.

Let’s start from the beginning because major infrastructure has been around since the 1940’s when the U.S. population burgeoned, and the federal government allocated funding for research and development of essential infrastructure. In 1956, the Federal Aid Highway Act was enacted, utilizing public and private investments to create construction jobs and develop the transportation sector, both of which helped to generate great economic benefits and growth. What’s truly amazing about infrastructure is that there is a positive correlation between public infrastructure investments and private economic growth. The synergy of public and private partnerships directly impacted the industrial revolution, urbanization and will likely drive transformational change into the 4th industrial revolution as investors pour capital into IT/Digital infrastructure to support the wave of artificial intelligence and direct impacts of 5G. Should infrastructure be limited to core assets when modern telecommunications are essential to our way life and an economic undercurrent of both the communication and transportation industry? Infrastructure investors see opportunities in these areas and the impact investing space has been investing in these sectors to systematically change underserved and undeveloped communities.

Impact investing was first discussed as a new financial investment in 2007 at the Rockefeller Foundation’s Bellagio Center, where a group of like-minded conscious and collaborative investors were credited for coining the term.  Impact investing hasn’t been around as long as the infrastructure asset class but in many ways the idea of double or triple bottom line investing was a financial tool that everyone had unknowingly bought into without really highlighting the social and environmental benefits. According to the Global Impact Investing Network (GIIN), “impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”  Impact investing can occur across a broad spectrum of asset classes, various sectors and across all geographies.  GIIN estimates the global impact investing market to be over $500 billion and is attracting attention from various capital sources including pension funds and foundations, just like infrastructure has in the past.

Environmental or renewable assets are investment platforms that can be found in both impact and infrastructure investment funds. Investing in wastewater treatment projects, which provide clean water to communities, could fall into the category of sustainable infrastructure or impact investing. Clean energy, water treatment/delivery and preservation of nature or restoration are all sub-sectors of infrastructure investing that has seen a lot investment activity as these investments require a long-term commitment or investment period with long lasting results and great financial rewards.

Social infrastructure is another sector overlap into most impact investing funds or affordable housing investment platforms, as it supports a social good and provides a number of benefits for the community. Within social infrastructure, sub-sectors include university and senior care housing, hospitals, municipal buildings and public service structures including convention centers, museums, sporting facilities and more. Within impact, these same projects or investments would be implemented in emerging or developing markets. Many of the contracts are structured alongside governmental entities and private institutions. In some cases, nonprofit or foundation-based grants are awarded to a project as well depending on the ultimate objective or investment strategy. In emerging markets, partnerships are crucial with the World Bank or International Finance Corp to invest capital alongside private investors.

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Impact and infrastructure investments are not always treated equally and depending on how the deal is structured, the investment analysis and returns can vary widely depending on the sector and the market. When it comes to social infrastructure, social housing contracts are structured as a public private partnership (P3), contracts with revenues derived via availability payments. The federal or local government awards such contracts to private investors where they bid on the deal based upon their interest and potential financial gain and overall risk. Typically, the returns on P3 contracts can vary depending on the stage of development risk involved and deal pricing due to the competitive investor market. Infrastructure also allocates larger amounts of capital compared to impact investing ticket sizes because infrastructure assets are more capital intensive and, depending on the asset, can have a much longer construction period. Impact investing returns compared to infrastructure returns tend to be higher due to the additional levels or risks investors are willing to undertake, where revenues are not 100% contracted and in most cases there is minimal annual cash yield.

As investors seek opportunistic deals and investment allocations into infrastructure and impact investing funds, private equity (PE) managers are looking for interesting ways to differentiate themselves during the fundraising stage. Large investment firms are launching impact and infrastructure funds that play into this gray area of impact and infrastructure. With traditional PE risk, adjusted returns tend to be higher and the time horizon might be two to three years shorter, depending on the industry or sector. Infrastructure funds have a much longer hold period averaging 10-13 years compared to impact funds and other PE funds at 8-10 years. Asset managers such as Blackrock, UBS, KKR, TPG, Blackstone and so many more are providing opportunities for investors to obtain stable returns, inflation adjusted protections, and diversification into a gray area of impact and infrastructure investing.

Kristina Whyte
Kristina Whyte ‘18

About the author: Kristina Whyte, Yale MBA ’18 – Private Equity investor in Real Assets, Energy & Infrastructure at Nuveen, covering various sectors and geographies. She is the co-founder and host of “Impact On Record,” a podcast on impact investing. Born and raised in Brooklyn, New York she’s a catalyst of change in her community, encouraging inclusive growth and environmental impact. Kristina is a board member of Roads to Success, a nonprofit that provides out-of-school programming to NYC youth to promote self-discovery. Find her on Twitter @ImpactOnRecord

About the author

Kristina Whyte

MBA for Executives candidate, Class of 2018

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