The Subsidy to Infrastructure as an Asset Class
59 Pages Posted: 24 Sep 2018 Last revised: 2 Jun 2019
Date Written: May 2019
We investigate the characteristics of infrastructure as an asset class from the perspective of a limited partner. The stream of cash flows and riskiness of performance delivered by private infrastructure funds to institutional investors is very similar to that delivered by other types of private equity, as reflected by the frequency and amounts of net cash flows as well as by the volatility of performance measures. Public investors, such as public pension funds, government agencies, and sovereign wealth funds perform worse than private institutional investors in their infrastructure fund investments, although they are exposed to underlying deals with very similar project stage, concession terms, ownership structure, industry, and geographical location. By selecting funds that invest in projects with poor financial performance, public investors have created an implicit subsidy to infrastructure as an asset class, which we estimate at a minimum of $1.3-$1.5 billion per year if the alternative opportunity is the S&P 500 or real estate funds, $3.3 billion per year if compared to listed infrastructure funds, and $8.5 billion per year if compared to private equity buyout funds. The public subsidy is not primarily driven by local investments.
Keywords: Infrastructure, Public Pension Funds, Institutional Investors
JEL Classification: G11, G23, G28, H54, H75
Suggested Citation: Suggested Citation