Infrastructure is rather a sexy word at the moment. The banks are bust, the economy looks precarious, bonds are yielding almost nothing; where can you get a return? Infrastructure seems to be the right place. High quality income streams, high yields, little exposure to economic contraction - all the right things to help investors weather a recession.
Actually investing in infrastructure, though, hasn't always been as easy as it looked. Buying construction companies is one way in, but they only make money at the start of the contract - whereas what investors are really after is the long term cash cow. In France , for instance, toll motorways were part funded by the stock market; in the UK, BAA provided investors with a chance to buy into the cash flow of the main London and Scottish airports, till the company was taken over.
The Private Finance Initiative (PFI) and other PPP (Public-Private Partnership) schemes have created fascinating vehicles for the private sector to invest in infrastructure. They have great long term cash flow, but they're tricky to get into as a secondary investor. The limited liquidity and often high gearing of the underlying investments, together with their long-term nature, makes many of them unsuitable for the stock market.
However, there are a number of funds that give investors exposure to the infrastructure sector. I've looked at two - the 3i Infrastructure Fund (£3iN ) and the HSBC Infrastructure Company Ltd ( Hsbc Infrastructure ). They may sound similar, and they are both offshore companies (hey! You don't pay stamp duty on them!) - 3iN is Jersey based, HICL is Guernsey registered - but they're actually quite distinctive in their investment policies and portfolios.
3iN was spun off from 3i, the venture capital fund manager, and 3i still advises it on its investments. It seems to have a rather patchy portfolio - an investment in Anglian Water, an investment in I2 (a fund investing in the PFI secondary market), an investment in 3i's India Infrastructure Fund, 10% of Novera, and a bunch of other assets including the Norfolk & Norwich Hospital, and a German waste to energy plant.
The major risk to this fund is any breakdown in the relationship with 3i. Currently, it has a right of first refusal over 3i investment ideas in Europe and North America, but this expires in 2012. It can also be required to…
