Retirement funds seeking exposure to infrastructure assets have a number of investment instruments or asset classes available to them for investing in infrastructure.
Infrastructure across multiple instruments
Added to an understanding of the fundamental aspects of infrastructure assets, it is important to appreciate how institutional investors would traditionally approach investing in infrastructure assets. The prudential investment requirements in Regulation 28 of the Pension Fund’s Act support retirement funds investing in a diversified portfolio of assets across multiple asset classes. This can, for example, be achieved by investing in a portfolio of infrastructure assets, where the fund is able to achieve a diversified exposure to the infrastructure theme across multiple asset classes.
While infrastructure investments are generally classified as unlisted investments, there are a number of other investment instruments available to investors, such as retirement funds, seeking exposure to infrastructure assets. Table 1 ranks instruments based on several dimensions. The left-hand margin describes modes of investment, recognising that there are broad asset categories (fixed income, mixed, equity), followed by principal instruments. Besides the fact that investors can be creditors or equity holders, some investments – particularly public-private partnership (PPP) contracts and concessions – may have debt-like characteristics due to contracted cashflows. As indicated in Table 1, The Organisation for Economic Co-operation and Development (OECD) has defined asset categories by their nature, with the distinction drawn between whether an investor receives priority claims in corporate or project cashflows (creditor), mixed (creditor with equity participation rights), or residual claims to cashflows (equity).
From an investor’s perspective, the asset class chosen for the investment into the infrastructure project or fund will depend on the nature of the asset (debt, equity, listed or unlisted), regulatory and tax considerations, and on how investors have defined and allocated infrastructure in their portfolios based on their own portfolio of assets measured against liabilities. Smaller investors with limited resources and small amounts of capital allocated to infrastructure are limited to collective or pooled and corporate investments, while large funds may be able to commit capital directly to infrastructure projects.
Loans and bonds form the largest categories of infrastructure finance. Debt instruments can be structured to have long-term maturities that extend over the life of long-term assets, such as infrastructure assets. Debt financing can be provided though multiple instruments; debt instruments can take the form of direct loans held on the balance sheets of financial institutions or may be structured for resale to investors via private markets (private-placement debt), or public markets through registered corporate and government bonds.
Financial instrument classification
The ASISA Infrastructure Investment Definition, Classification and Statistics Standard (August 2020) classified financial instrument definitions as follows:
- An equity investment is a claim on the investee’s residual cashflow after operations and financing, the opportunity to participate in the corporate decision-making process, and a claim on the company’s net assets in the case of liquidation.
- Debt is defined as an instrument that gives rise, on specified dates, to cashflows that are solely payments of principal and interest on the principal amount outstanding.
- Senior debt is debt that has priority of payment over a tranche of junior or mezzanine debt. There may be different levels of priority within the senior debt category, but as long as there is a material level of debt that ranks below the instrument, it is classified as senior debt. (Senior debt is often secured against assets; however, in the context of project finance in the infrastructure space, this is less relevant and thus not seen as an essential characteristic of senior debt.)
- Junior or mezzanine debt is debt that ranks the lowest in priority of payment and is normally unsecured or has a reversionary right to security.
ASISA | OECD
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