Infrastructure is the physical assets that provide an essential service to society. These are the services we use and interact with every day. For instance, we use gas, water and electricity to carry out our daily activities and we also use infrastructure, such as airports, rail and roads, to move people and goods from location to location.
Our infrastructure investment process is designed to leverage the observation that, over time, asset valuations reflect long-term cash flows. As a result, our specialist team focuses on the infrastructure assets that display more predictable cash flows.
Broadly, infrastructure can be categorised into:
With regulated assets, such as water, electricity and gas transmission and distribution, the regulator determines the revenues that a company should earn on their assets. If an asset earns too much, then the company is required to return some of its revenues to its customers by lowering prices. Conversely, if the asset earns too little, then the company is able to increase its prices. Because demand for these assets are steady and the regulator determines revenue, this mechanism leads to a relatively stable cash flow profile over time. Additionally, the regulator periodically takes into account inflation and bond yields, which means price increases are often linked to inflation and long-term valuations are relatively immune to changes in bond yields.
With user-pays assets, pricing is generally set by contracts, however volume and therefore revenue is determined by how many people use their assets. These physical assets namely rail, airports, roads and telecommunications towers, move people, goods and services throughout an economy. Therefore as an economy grows, develops and prospers, demand for these assets also typically grow. For instance, as more people use, and to some degree depend on mobile phone data, we see mobile communications towers adding additional capacity to the physical towers to meet this demand.