Allinfra’s focus is the development of technology for the tokenization of unlisted infrastructure. But why focus on infrastructure? What are the characteristics of this asset class that make it ripe for disruption through tokenization and at the same time appealing to a broad spectrum of both investors and asset owners? What are the problems with the current investment model?
There are a number of factors that drive infrastructure investment. These include, but are not limited to:
Providing an inflation hedge
Many classes of infrastructure provide inflation adjustment in the form of end user prices being indexed to inflation, or the flexibility of the operator to pass along operational cost increases that rise in parallel with inflation. This inflation linked revenue growth and cost pass-through allows the asset class to act as a good inflation hedge.
Stable operations and predictable cash flow
With relatively low operating risk, long economic lives and through the provision of essential services, asset level cash flows remain robust even in markets of significant volatility, with returns uncorrelated to the business cycle.
High barriers to entry
As infrastructure assets typically provide essential services and require significant cost and expertise to bring into operation, they are inherently resilient to competition. Depending on the underlying asset, you will normally see significant barriers to entry in the markets in which these assets operate. This protection ensures a captive market over the term of the concession related to the asset.
In addition to these key features, the strong linking of infrastructure to the achievement of sustainable development goals is often seen as a critical investment driver, an important trend that will continue. This trend favors infrastructure assets that deliver essential services, while having a positive environmental and social impact, such assets being instrumental in the transition to a sustainable economy. Making an investment in high quality and clean infrastructure provides the investor not only with a long term stable cash flow, but also contributes in a meaningful way to a community’s long term environmental, social and economic goals.
These features combine to create an appealing, differentiated asset class. Unfortunately, exposure to single unlisted assets or concentrated groups of assets is very difficult to achieve for all but the largest investors.
The current model of investment
Investors essentially have four options for investing in infrastructure: publicly listed funds, private funds, funds of funds or direct investment. Each offer their own pros and cons and are traditionally used by investors — either individually or as a group — to fill specific needs in their portfolios (i.e., liquidity, returns, income, among others). They also offer varying levels of liquidity. A brief assessment of each option follows:
Publicly listed funds
These are vehicles traditionally listed on public exchanges. They provide high liquidity, relatively low transaction costs and market pricing, however investors in these funds typically do not have direct investment access to single assets.
Private infrastructure funds
Similar to a private equity fund, investors commit capital to an investment pool which is then drawn as required for investment opportunities along with periodic management fees and fee carry if the asset performs above a targeted hurdle rate. These funds have limited liquidity and average life spans ranging from 5 to 15 years. The fund manager, or general partner (“GP”) usually seeks to enhance the value of the assets by improving the management or operations of the underlying assets.
Fund of funds (FoFs)
These structures offer investors the option to allocate to several GPs at once (typically numbering between 8 and 12 per FoF). Similar to investing with a single GP, capital is committed and then drawn on an as-needed basis. Liquidity is limited, and life spans are comparable to individual GPs, they also charge an extra layer of fees to investors over and above the fees of the underlying funds. FoF managers generally specialize in due diligence and diversification of fund managers rather than infrastructure assets.
Traditionally available only to large institutional investors, this option gives the investor direct ownership (either total or partial) of the infrastructure asset. Investors usually seek this option as a potential source of steady income.
Issues with the current model
Lack of access
The ability for smaller institutions and indeed individuals to invest directly in an infrastructure asset is severely constrained. Infrastructure is a capital intensive and complex asset class. Investor exposure, whether individual or institutional is almost always through specialist fund managers. The investors in these unlisted infrastructure funds are invariably other layers of funds or money managers looking to allocate to infrastructure but because of investment size or expertise required, are unable or unwilling to invest directly in the underlying asset.
Lack of liquidity
Infrastructure assets are long dated and similarly, investors in these assets have longer term time horizons. The limited number of direct investors in these assets, combined with the long term profile of the underlying asset means that the liquidity in the secondary market for unlisted infrastructure equity is limited.
Lack of choice
The limited access to infrastructure assets for the end investor creates inefficiency when allocating within the asset class. As direct investment in a particular asset is almost impossible for the smaller institution or individual end investor, it is a virtual certainty that the exposure of the end investor to the infrastructure sub sector of choice will be severely diluted in any fund. Taking the example of an individual that wants to invest specifically in one or more operating Asian solar assets. This individual would find it near impossible to make a direct investment in a specific asset, but more importantly, an investment in a specialist fund (making a direct investment) or in an infrastructure fund one layer above the direct investor, is likely to be be diluted across multiple assets either within Asian solar, within renewables or within infrastructure as a whole.
The lack of access, choice and liquidity results in increased total cost for the end investor versus a more direct path to exposure. An inability to gain direct access adds layers of funds management fees, friction costs and performance risk. Limited liquidity and holder base for asset equity results in wider spreads and greater trading costs both at the asset level and at interests at the fund level.
How is Allinfra changing this market?
Allinfra seeks to democratize infrastructure financing through the provision of accessible, low cost, direct exposure to unlisted infrastructure assets. Our name, utilizing the universal quantifier as the second “a” is a nod to our core objective of making the financial and commercial benefits of infrastructure available “for all”.
Allinfra has built a platform to allow selected developers, asset owners and other parties to effectively tokenize exposure to infrastructure, raising financing across the capital structure.
What are the key benefits of Allinfra, over and above current market structure?
Direct economic interest in an underlying asset or group of assets. The platform will allow for the creation of tokens representing individual assets or pools of assets within an infrastructure sub sector or region.
A tradeable token representing a direct economic or ownership interest in an asset or group of assets will be a significant improvement on the current unlisted infrastructure market, where we see the majority of high grade, quality assets. Our aim is to have individual tokens tradeable across multiple venues. This is critical in ensuring we achieve our goal of infrastructure for all.
With tokens able to represent an economic or ownership interest in individual assets or pools of similar assets, the buyer will benefit from undiluted exposure to the assets of their choice — something unavailable in today’s traditional financial markets.
Greater share of returns to the end investor
Direct exposure with no additional intermediaries other than the issuer vehicle brings the token buyer closer to the asset than in other unlisted infrastructure investment scenarios. By eliminating intermediaries we’re removing layers of management fees, entry/exit fees, performance fees and other friction costs associated with holding an asset, ultimately leading to a greater share of returns flowing to the end investor.
As the platform develops we will be looking to implement real time asset reporting — allowing tokenholders to understand asset performance on a real time basis rather than receiving operational updates periodically.
Team and expertise
Unlike other asset tokenization projects, Allinfra is not just a technology provider — our entities provide the technology, source the asset, manage the asset and manage the token over its life cycle. Our expertise across the value chain means Allinfra is significantly differentiated from pure technology providers and deal originators — our values are 100% aligned with the end holder, from issuance to end of life. Our entities’ screening procedures, diligence processes and lifetime value creation policies are what you would expect to see in an institutional offering and are managed by individuals with decades of buy side and institutional asset management experience.
We hope you’re as excited about the unlisted infrastructure opportunity as us here at Allinfra. Be sure to checkout allinfra.com, sign up for our newsletter and follow us @all_infra on twitter.