Private Infrastructure Funds are a type of fund that uses the capital of investors to invest in private assets. The fund managers have a controlling interest in the projects and take an active role in improving and managing them. They can then sell them at a higher price than the initial investment. Private Infrastructure Funds are usually backed by governments in the Middle East and Asia. Other investors include construction companies. Some examples include Encap, Riverstone, and Allianz Capital Partners.
The need for infrastructure investment is growing as cities and regions grow and urbanization continues. Many existing assets need modernization or refurbishment, and private investor capital is expected to play a crucial role in financing them. Private infrastructure projects tend to generate predictable cash flows that are less sensitive to market fluctuations than other types of investments. This makes private infrastructure funds a particularly attractive investment option for investors seeking a high yield.
Private Infrastructure Funds have generally performed better than their benchmark over long periods of time. However, there are several factors that can affect their performance. For example, political risks in emerging markets can significantly affect the value of an asset class. Therefore, it is important to do proper due diligence when selecting a fund manager.
Infrastructure Funds may also involve a risk of high leverage. These funds often enter into subscription line facilities to bridge the difference between their investors’ capital commitments. Although underlying credit analysis for private infrastructure funds and private equity funds is similar, the pricing of infrastructure funds in the UK is lower due to their reliability in revenue generation.
Private infrastructure funds are focused on the middle market, primarily in the energy and renewable energy industries. However, while the pool of opportunities for these assets has increased, the size of the middle market has not kept pace. Most of the investment activity has been concentrated on North America, Europe, and Australasia. Large investments have been made in the power and transportation sectors. However, the renewables sector attracted the most middle market capital last year. Onshore wind and solar photovoltaic assets represented 21% and 16% of overall brownfield deal value, respectively.
Private infrastructure funds are consistently outperforming their publicly listed counterparts. One study by Cambridge Associates found that the average private infrastructure fund’s performance is 67bps higher on an annualized basis than the benchmark for the public infrastructure. This is due to the lower correlations and volatility that are associated with private infrastructure. This makes private infrastructure funds a superior option for investors who want a stable and predictable investment.
Private Infrastructure Funds are often valued on a discounted cash flow basis and their NAV is based on the projected cash flows from individual projects. This method of valuation is less subjective than private equity NAV forecasts, although these valuations are still based on operative assumptions. Besides, they are subject to a variety of other factors, such as economic conditions.