These assets generate returns mainly from contractual cashflows. They require little operational improvement, and have minimal obsolescence or technology risks. Regulated utilities or energy assets with long-term contracts would be typical examples. These are considered to be the lowest-risk infrastructure investments but come with similarly low returns – often in the mid-to-high single digits.
These are similar to core assets, but with a greater level of revenue risk or required capital expenditure to justify slightly higher returns. They may be less monopolistic or have less durable revenues, with returns coming from a mix of income and capital appreciation. Investors are paid through semi-regular distributions from operating cashflows. Typical returns may be 8-10 percent.
Similar to value-add strategies in real estate, these focus on an expansion of – or an upgrade to – an existing asset with a cashflow profile augmented by additional capital investment. Returns are driven by long-term growth in the value of the asset rather than by current income generation. Cashflow may be reinvested into the assets and not paid to investors until enhancement of the asset is complete. Typical returns may be 10-12 percent.
These are at the opposite end of the risk/reward spectrum from core and typically target a new asset without existing cashflow. With greater exposure to greenfield projects and non-contracted revenues, managers will typically look to turn these assets over time into core or core-plus investments. Opportunistic vehicles target the same kinds of returns as private equity investments. Returns are often based on capital appreciation, though some generate a moderate amount of current yield.
The stable, visible cashflows of infrastructure projects allow for consistent debt servicing throughout their useful life. Infrastructure debt strategies generally have low levels of loss and managers typically differentiate themselves through the flexibility of the terms they offer to borrowers, the availability of debt financing for specific assets and the ability to conduct in-depth credit analysis. Typical returns may be 3-5 percent over LIBOR.