While interest rates remain low, infrastructure investment makes more sense than ever.

Infrastructure investment has long been considered unsexy. It yields little, has long tenors, and in emerging markets it is prone to higher regulatory and political risk.

Aside from very few outlier countries such as China, governments around the world have reduced their infrastructure spending. As risk-sensitive players who need to guarantee returns to their policy-holders or shareholders, private institutional investors have been even less keen on infrastructure investment.

But if the global economy is to meet 2030 growth forecasts, countries worldwide will need to invest the equivalent of Germany’s gross domestic product in infrastructure every year. Today, the shortfall comes to about $800bn.

So now, more than ever, institutional investors – both public and private – need to step up their support of infrastructure financing. This is especially true in emerging markets, which account for 60% of global infrastructure investment needs.

In a time of low interest rates, investing in emerging market infrastructure makes perfect sense. Yield pick-up over equivalent projects in developed countries approaches 350 basis points.  

But how about risk? A pioneering platform set up by the International Finance Corporation has already convinced AXA, Allianz, Eastspring Investments and a fourth investor who wishes to remain anonymous to co-invest with the multilateral in emerging market infrastructure loans. In return, the investors get to invest pari passu with an organisation that is an expert in such projects, and forget about originating any of the deals and enjoy a first-loss guarantee.

These new partnerships are finding ways to make private and public institutional investors comfortable with infrastructure. But beyond meeting risk-reward expectations, the investment community would do well to bear in mind the centrality of infrastructure to the overall functioning of an economy. Investing in infrastructure ultimately means investing in the performance of any and all other investments in that same market.

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