Eyes on the future: PPPs and infrastructure assets

As global demand for improved infrastructure rises in tandem with institutional investors’ need to invest large capital pools in long-term assets, allocations of private capital to public infrastructure, as an investment asset class, are set to grow significantly. The public-private partnership (PPP) model is increasingly being deployed by governments and investors around the world to inject private capital into the asset class.

To address burgeoning demand, governments struggling to balance their budgets must encourage private-capital investment in infrastructure. This shouldn’t be a tough sell for institutional investors like pension funds, sovereign wealth funds and insurance companies, whose investment needs align well with infrastructure assets, which offer long-term and stable cash flows to offset long-term liabilities. These assets also often have built-in inflation protection, and their relative illiquidity compared to other asset classes may not be a big issue for such investors.

The most salient trend reported in the OECD’s December 2014 Annual Survey of Large Pension Funds and Public Pension Reserve Funds was an increase in alternative investments, including infrastructure. While actual investment in infrastructure was low on average, there is huge potential demand, with many funds increasing their allocation to infrastructure or opening new allocations to the infrastructure asset class. According to the report, target allocations among the funds with dedicated infrastructure exposure ranged from 1% to over 20% of total assets.