What role can U.S. infrastructure have in an investment portfolio?
Infrastructure as a new asset class has several distinct and attractive investment characteristics with the potential to enhance returns, provide high and stable cash flows, and mitigate risk as part of a broader portfolio.
“The U.S. infrastructure market is fascinating because there is far more demand for investment than there are investment opportunities.”
Having served as the first Special Assistant to the President for Infrastructure, DJ Gribbin led the development of the Trump Administration’s $1 trillion infrastructure plan. In his interview with Real Vision’s Managing Editor, Ed Harrison, Gribbin explains that there is a need for developing projects on the public sector side to attract private investment.
The Trade: As rates fall to zero and bonds fail to hedge downside equity risk in a 60/40 portfolio, consider investing in infrastructure. It is an asset class, uncorrelated with others, with a dearth of supply and an abundance of capital that still offers safe, high, and long duration returns.
- “When you think of an infrastructure investment, infrastructure investors are normally looking for opportunities to invest in assets that have high barriers to entry, that have constant demand, and that will be stable over the course of decades.”
But, know this: Public infrastructure investments are owned mostly at the state and local level. But, in a pandemic, the federal level is where much of the potential government largesse resides.
Gribbin here explains the role of the federal government in the U.S.’s infrastructure.
- “The federal government itself owns about 8% of our nation’s infrastructure, funds about 25% of our transportation infrastructure. It is an important player, but it is a marginal player when it comes to infrastructure. The vast majority of infrastructure in the United States is owned by the private sector, about half of it is owned by the private sector. Then about the other 40% of it is owned by state and local governments.”
- “The federal government can be a lender infrastructure, and it can be a grant-maker infrastructure, but it is not really an owner of infrastructure in our country.”Gribbin, however, cites that the federal funding structure by itself can be problematic—from a cumbersome process of getting projects off the ground to misaligned incentives baked into federal funding.
How do you identify opportune investments?:
One example Gribbin provided is how investors can receive concessions on the governmental infrastructure that they invest in.
- “An investor might enter into a 30-, 40-, 100-year concession on an asset where the government would still own the asset. The government still owns the toll road, but the concessionaire would own the right to collect tolls on that facility, and then the responsibilities of maintaining and expanding that facility as demand increases over time.”
Seeing Where the Highest ROI Is:
The above highlights an important point Gribbin drives home when sharing his thoughts on underinvestment in U.S. infrastructure.
- “The challenge you have is that investment is not so much a capital investment, but an operating investment. When the highway system particular was set up, and transit is modeled similarly, when the federal government will pay to build something, but then it is the community and the users’ responsibility to maintain it. What we are seeing now is the highest return on investment actually comes from maintenance dollars, not capital dollars.”
Identifying infrastructure categories that can supply ROI in operations is key. For example, Gribbin says water is an infrastructure category in the U.S. with a lot of potential.
- “One of the things I think those who want to invest more in U.S. infrastructure need to put on their to-do list is looking for opportunities to help shape a sensible policy conversation around how do we deliver water to people?”
- “There are 53,000 water utilities in the US. That is about a little more than 1000 per state. It is an unbelievably fragmented market.”
Investing in Leadership:
In terms of governmental infrastructure, Gribbin also emphasizes the significance of investing in leadership. Gribbin suggests finding the local and state leader – from the mayor and the county executive to the governor and the authority head – and “invest in that individual.”
- “Find that individual … that is bold, that is innovative, that is creative, that wants to do something different, that wants to build something faster, that want to build a better, wants to use more innovation and more technology.”
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