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| Risk & Reward: Products |
Urban Opportunities
John Ferry
03/01/2008
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At some point during 2008, for
the first time in the history of our species, more human beings will live in
urban places than rural ones, according to the Washington, D.C.–based Worldwatch
Institute research organization. In light of this milestone, investors should
position themselves to take advantage of long-term demographic trends. They
should also protect their wealth from any potential negative side effects.
On the opportunities side, the companies that rely specifically
on urban dwellers for growth—Starbucks, for instance—are low-hanging fruit for
investors. Long-term positions in these companies will, no doubt, deliver
satisfactory returns.
 Yet there is another, more immediate option. As people continue
to move into towns and cities, infrastructure financing, construction and
maintenance become ever more critical. At the same time, governments are no
longer willing to fund infrastructure projects through taxation. Instead, they
are increasingly turning to the private sector and to capital markets to fund
the maintenance and expansion of transportation and communication networks,
health and education facilities, and water and energy distribution systems,
among others. In developed countries, there have been large-scale privatization
programs and public-private partnership arrangements in which the government
brings in private-sector companies to operate infrastructure assets on a
monopoly basis on fixed-term contracts.
The emergence of a market for these types of assets has led to
a proliferation of funds that build portfolios of direct investments in
infrastructure. These infrastructure funds buy up—or at least take significant
stakes in—water and energy utilities, social infrastructure such as hospitals,
public buildings and railway stations, and various kinds of commercial
infrastructure, such as mobile-phone towers and cable networks.
The returns to date look enticing. "Across all of the
[infrastructure] funds that we manage, our average annual return for the last 15
years is 19.8 percent, with very low volatility," says Arthur Rakowski, the
London-based executive director of the European infrastructure and
specialized-funds business of Australia’s Macquarie Bank.
Stability First
Infrastructure funds first came on the scene in the mid-1990s
in Australia. The government introduced compulsory pension saving for its
citizens, which instantly led to a big increase in the amount of pension money
that had to be invested somewhere. Around the same time, the Australian
government began selling off the country’s infrastructure, which had been
growing decrepit from chronic underinvestment. A group of investment bankers,
led by Macquarie, saw an opportunity to step in and buy infrastructure assets as
they appeared on the market, borrowing the money to fund their purchases on the
back of the stable, secure, long-term cash flows that the assets typically
offered. The bank then repackaged these assets into infrastructure funds, shares
of which could be sold to the asset-hungry pension funds.
With a steady stream of infrastructure assets coming on the
market from developed countries, that model has now gone global, with a variety
of banks and asset managers competing to establish funds. Macquarie, for
example, currently has infrastructure funds listed on exchanges in Australia,
Singapore, Korea and Canada, as well as on the New York Stock Exchange.
The big selling point for private and institutional investors
is stable cash flow. "The attraction of infrastructure is long-term predictable
income with an element of growth, and also inflation protection," Rakowski
says.
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