Investing in Infrastructure: A Primer
June 27, 2008
On November 4, 1977, a wealthy investor from the U.S. Midwest took the stand in a Buffalo, N.Y. courtroom to defend himself against charges of anti-competitive behavior following his acquisition of one of the town’s two local newspapers, the Buffalo Courier-News.
The rival newspaper’s lawyer intensely probed his interest in another form of monopoly—toll bridges. His response is informative: “I have said in an inflationary world that a toll bridge would be a great thing to own…”
Warren Buffett was not asked nor did he feel obliged to mention that through an entity controlled by Berkshire Hathaway, he already owned 24% of the stock of the Detroit International Bridge Co., the owner of the Ambassador Bridge between Detroit and Windsor—at the time, the only toll bridge that was owned by stockholders in the United States.
The same characteristics that motivated Buffett in the 1970s to invest in infrastructure are attracting a new wave of institutional investors around the globe. These new investors are in addition to the institutional investors in Europe, Canada and Australia who have invested in the asset class for years. Infrastructure assets are in demand due primarily to their relative independence from business cycle risk and their historically stable operating cash flows correlated to inflation. The assets generally provide essential services, and are typically characterized as having large, upfront capital expenditures, high barriers to entry, and natural or regulated monopoly characteristics.
By virtue of its distinct investment characteristics, infrastructure should be considered an emerging asset class in its own right. Growing numbers of financial institutions are investing in infrastructure as they seek to diversify returns. For pension funds in particular, looking to solve pension deficit problems, infrastructure has the twin attractions of durations that are similar to their liability profiles and the capacity to put large sums of money to work. By investing relatively large sums of capital in infrastructure assets, pension fund trustees may make material advances towards reducing their deficitswith a reasonable degree of certainty.