Ullico Bulletin

Evaluating Infrastructure Investments

Jeff Murphy

Attendees to the 61st U.S. Annual Employee Benefits Conference got a primer on how to invest in infrastructure. Jeff Murphy, managing director of Ullico Infrastructure Fund, contributed to an education session that included the history of infrastructure investing, along with insights about valuation, drivers of return and potential risks associated with this particular form of investment.

He was joined by Michael D. Joyce, executive vice president and senior consultant with the Marco Consulting Group; and Jay L. Rosenberg, managing director for Nuveen Asset Management.

The panelists started with an overview of infrastructure sub-sectors, including:

  • Transportation: airports, seaports, toll roads, parking, bridges and tunnels, freight rail
  • Utilities: power generation, electricity transmission, gas distribution, renewable energy, telecommunications, waste and wastewater
  • Social: health care facilities, prisons, schools

They also shared a list of performance characteristics to consider when evaluating infrastructure investments, along with the potential obtainable benefits.

Characteristics of Infrastructure

Performance Characteristics Potential Obtainable Benefits for Pension Funds Investing in Infrastructure
Long Duration Assets Long-term assets of infrastructure businesses match long-term liabilities of pension funds
Real Asset Backed Real assets have low correlation to traditional stocks and bonds, can lower overall portfolio risk while enhancing potential for better long-term risk adjusted returns
Moderate Risk Innate risks of core infrastructure businesses can offer quality risk-adjusted returns. Potential opportunity for investment returns in excess of pension fund's actuarial assumption
Stable Cash Flow Infrastructure businesses, notable those with highly structured/regulated revenues and expenses, can produce regular and predictable cash flow
Potential Positive Employment Characteristics Dependent on a variety of factors including sector, industry and type of infrastructure
Low Volatility Cash flow and book value of contracted/regulated infrastructure businesses can be minimally affected by market cycles, notably when investment horizon is long and use of leverage is prudent
Inflation Linked Infrastructure business provide goods and services and their revenues and expenses are typically adjusted with inflation. Inflation can have an eroding effect on a portfolio
Monopolistic High barriers to entry in many industries and sectors offers a moderately stable supply
Inelastic Demand The supply and demand for service and goods are less impacted when the price of that service or good changes
Diversification Benefits Based upon risk and returns assuptions, a moderate allocation to infrastructure can add value to a portfolio due to the correlation benefits


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