Infrastructure helps weather downturns

Stable political and regulatory environments are key to successful infrastructure investing within emerging markets, says senior portfolio manager Nick Langley, investment director with RARE Infrastructure in Sydney, Australia, and portfolio manager for Renaissance Investments.”

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A lot of the assets are owned by concession, meaning contracts with governments are in play. These projects take a long time to complete before the investor sees a return.

“The companies carry some regulatory risk,” Langley says. “These are often sensitive assets utilized by whole communities, large numbers of consumers, and so regulators are there to balance against the monopoly pricing power of utilities.

“So if your regulator becomes, let’s say, more consumer-friendly than shareholder-friendly, that does pose some danger in terms of returns in the space. And our job is to manage that.”

Investors need to be comfortable that there are stable regulatory and contractual underpinnings, and that the assets are properly financed upfront. Analysts look to ensure these enterprises have adequate access to both equity and debt-based capital markets.

“In that case, the returns are locked in over a long period of time and there’s not a lot of risk in the assets themselves.”

Langley notes emerging markets continue to have a strong growth profile.

“It gets a reasonable share of the upside when the markets are improving, because they expose you to a number of the more cyclical aspects including the freight moving through ports, toll roads and rail,” he says.

“It’s an ideal defensive asset class during market downturns. A large portion of the business and revenues of the infrastructure sector are uncorrelated to GDP.”