Unlisted infrastructure offers unrivalled downside protection

Vast amounts of capital are needed to build and maintain the infrastructure that is essential for the operation of modern society. Be it water supply, energy and electricity, communications infrastructure, transport, or social infrastructure, the user demand is evolving and growing.

The megatrends of our time – notably urbanization, energy transition, and population growth – drive the demand. Private capital is increasingly important in funding and operating essential infrastructure, as national and local governments are ever more capital constrained.

Over the last ten years, unlisted infrastructure has manifested itself as one of the core alternative asset classes, alongside private equity, private debt, and real estate. Over this period, assets managed by unlisted infrastructure funds globally more than quadrupled to surpass $1 trillion in 2021 (source: Preqin Pro), driven by increased allocations from institutional investors and private wealth managers alike. Preqin’s Infrastructure Q2 2022 Update takes a look at why infrastructure fundraising has continued very strong in 2022.

Unlisted infrastructure offers strong returns with low correlation

Several unique investment characteristics attract investors to unlisted infrastructure. First, the underlying assets are critical to society, providing unrivalled downside protection. Second, their regulated nature, the monopolistic or oligopolistic environment in which they usually operate, and the strong cash conversion associated with infrastructure assets ensure that revenues and cash flow yield are stable and predictable. In addition, these regulated and contracted revenues very often benefit from explicit inflation linkage.

These unique characteristics have historically resulted in strong returns and a very low correlation between unlisted infrastructure and other asset classes – both listed and private assets. Thanks to this low correlation, adding unlisted infrastructure to a diversified investment portfolio can significantly improve its long-term risk/return expectation.

In this context, it is important to distinguish between unlisted and listed infrastructure. Even if the assets may have infrastructure characteristics, listed infrastructure companies are exposed to sentiment and price swings of the stock markets, which annuls many of the benefits that unlisted infrastructure can provide, such as downside protection and low correlation with listed equities.

Selection of the right partners is essential for success

Investing in unlisted infrastructure has its challenges, however. The minimum investment in a single unlisted infrastructure fund may be EUR 10 million or more. Multiple funds are needed to mitigate unnecessary risks, such as high concentration in certain assets, sectors, or geographies.

Fund selection is also critical: the performance dispersion between strong and weak funds is significant, so deep market knowledge and a robust and proactive investment process are needed to access the best out of the hundreds of infrastructure funds that will be fundraising at any given time.

Evli's Private assets team. Starting left: Richard Wanamo, Nina Skogster, Ville Toivakainen, Roger Naylor, Emma Honkanen, Oskar Karlsson, Ben Wärn. 

We at Evli have a successful 20+ year history of investing in private markets funds. Leveraging our scale, thorough investment process, integrated ESG evaluation, and dedicated fund selection expertise, our global infrastructure investment strategy is designed to capture all the benefits of unlisted infrastructure while lowering risk through proper diversification across assets, geographies, sectors, managers, and vintages.

Established in 2020, our infrastructure fund of funds program has a successful track record of implementing this strategy and accessing best-in-class funds, thereby giving our customers a practical way to build a solid cornerstone portfolio of attractive infrastructure assets.

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NB! Evli's alternative investment funds are intended for professional investors and a limited number of non-professional clients who make an investment of at least EUR 100,000 and who are considered to have an adequate understanding of the fund and its investment activities.