Infrastructure Investing Pt 2— An Alternative Strategy
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Long-only, publicly traded investments in stocks, bonds, and cash are your traditional investments. Every investment instrument. that falls outside of the above is classified as alternative. Alternative investments include non-traditional approaches to investing within special vehicles, such as private equity funds, hedge funds and allocations in assets that do not fall into the traditional investments category. The range of alternative investment categories is broad, but there are some common characteristics among the different types of investments.
Aiming for absolute returns.
Public Equity investments and bonds are linked to benchmark indexes and their performance is evaluated relative to the performance of those indices. Traditional investment performance is highly dependent on stage of the economic cycle. Investors allocating capital to alternative investments seek positive returns throughout the economic cycles.
Low Correlation of returns to traditional investments.
This is an important benefit for diversification purposes. Alternative investments are not free of risk of course. Their performance is influenced more by market/ industry specific factors and less from broad economic cycle variables, which makes them a sensible inclusion to diversify a traditional investment portfolio.
Infrastructure Investing, is one of the least volatile forms of alternative investments.
Infrastructure Investing
Infrastructure projects require a relatively large initial investment to start generating cash flows. In other words, the assets underlying infrastructure investing are to great extent fixed assets (PP&E).
Investing in Renewable energy generation assets is a form of infrastructure investing.
Like other infrastructure assets, Renewable Energy( RE) generation assets (wind, solar PV, biogas) share the following characteristics:
1. Long Lifespan and stable recurring cash flows from Energy Sales
2. Low sensitivity to Economic Cycles. Energy produced by Renewable Energy generation assets is prioritized in the market and sold before energy from conventional sources. There are usually revenue support schemes in place in favor of RE generation. This means that even if overall demand for energy or market price for energy drops, the cash inflows for the project company will not be severely affected.
There are therefore some key attractions for energy generation projects for investors. They offer counter-cyclical properties to the investors’ portfolio like other alternative investments. In addition to that, they also provide investors with stable, low risk cash flows.
What keeps people out of Infrastructure Investing?
Valuation Risk
Infrastructure projects are highly complex, leading to difficulties on standardization of disclosures for probability of cash flows or underlying risks. This makes it difficult to come up with a consistent valuation methodology that works across projects of similar scale/ technology.
Liquidity Risk
To increase the base of institutional investors into infrastructure finance, secondary market liquidity is key. Secondary market liquidity is the ability to sell bond modules before maturity or shares in projects at fair prices to other investors. Prerequisites for secondary markets transactions are
· Presence of specialized infrastructure investing platforms and
· Frequent updates of project information data so investors now what they are buying into, at dates past project initiation.
Deal Flow and Fees
Very few funds can source, audit and close great infrastructure deals. Most retail investors cannot access these funds and those that do, usually face high management fees.
How can Parity help ?
We are developing digital solutions to make Greentech investing accessible to a greater part of the economy. We are working with Investment Services Providers to release Parity Platform, a equity and debt financing platform for Renewable Energy Projects. The platform helps tackle:
- Information asymmetry by requiring comprehensive project information and frequent financial performance or construction progress updates.
- Liquidity risk by facilitating higher volume of transactions and bringing more participants in this alternative asset class.
- Deal flow. Our team sources projects to be uploaded to the platform in cooperation with our due diligence partners. We seek to showcase great Renewable Energy Projects in SE Europe.
At Parity Platform, we believe that greater participation to infrastructure investing leads to competitive financial returns for individuals and better growth outcomes for the economy. You can sign up receive article likes this and market reports from Parity Analysts here.
