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Unlocking infrastructure opportunities | UBS Switzerland

Unlocking infrastructure opportunities | UBS Switzerland

During the low-interest phase of recent years, institutional investors have included alternative investments such as infrastructure in their portfolios because of the higher return potential. As a result of interest rate increases, the return outlook for traditional asset classes, especially fixed income, has improved and investors have more flexibility to achieve their financial goals. However, risk and uncertainty are greater today than in the recent past. High inflation and high energy prices lead to volatile markets and often negative real returns. Investors can use infrastructure assets as a way to strengthen and diversify portfolio returns and navigate the environment of heightened macroeconomic uncertainty. The longer investment horizon of private markets funds typically makes these investments more resilient to short-term volatility.

Market volatility can also decrease the availability of traditional funding through banks or public capital markets. During such dislocations in public markets, private market funding can constitute a valuable source of capital for companies, which opens up entry opportunities for private markets investors.

Real assets have historically exhibited a low correlation to listed equities, a feature which is particularly attractive during periods of market volatility. Infrastructure assets in particular – comprising assets in the sectors energy transition, utility / water & circular economy, communication, transportation, and social infrastructure – are more resilient to macroeconomic volatility while benefiting from policy and structural tailwinds. High barriers to entry, regulation, and long-term contracts of many infrastructure assets make them less vulnerable to business cycles. Increased inflation tends to have a positive impact on infrastructure returns, as cash flows are often contractually linked to inflation. In addition to stable dividends from resilient cash flows, infrastructure is also backed by hard assets with long useful lives, which provides further downside protection. These factors have resulted in private infrastructure outperforming public equities in periods of high inflation, especially when coupled with low GDP growth.

In addition, infrastructure assets represent an attractive opportunity to take advantage of structural changes and benefit from long-term sustainability trends, such as decarbonization, digitalization and demographic change. The key role of infrastructure in enabling these trends is also recognized by governments, who have created stimulus plans which significantly incentivize investment in infrastructure, such as the USD 369 billion Inflation Reduction Act (IRA) in the US.