(Sundiata Post) – According to the Securities and Exchange Commission (SEC), Nigeria, infrastructure fund refers to a specialist fund or scheme that invests primarily (minimum 90 per cent of the scheme’s net assets) in securities and securitised debt instruments of:
▪ Infrastructure companies
▪ Infrastructure capital companies
▪ Infrastructure projects
▪ Special purpose vehicles which are created for the purpose of facilitating or promoting investment in infrastructure, and
▪ Other permissible assets, including, revenue generating projects of infrastructure companies, or projects of special purpose vehicles
Infrastructure funds are created and managed by specialist fund managers who make investment decisions on behalf of investors (which could be retail or institutional).
The funds represent a pool of monies, from various investors for the ultimate purpose of financing (at a perceived attractive return) the development of strategic infrastructure assets including transportation assets (such as roads, airports, ports, bridges and rails), utility and energy assets (such as power generation, electricity distribution, gas networks and fuel storage facilities), communications infrastructure (such as internet connectivity, transmission towers, etc.) and social infrastructure (such as education, recreation, waste management, healthcare, etc.).
The income generated by infrastructure funds is often distributed periodically to the investors (unit holders) after deducting the operating expenses, in line with stated investment objectives in the fund prospectus.
Infrastructure funds could be open- or closed-ended and may be listed on an exchange or unlisted. Open-ended funds are bought and sold on demand, and do not limit the unit of shares it can offer; whilst closed-ended funds have a fixed number of shares, traded amongst investors on an exchange.
Specialised funds that are listed and traded on an organised securities exchange such as FMDQ, offering infrastructure exposures to portfolio investors with lower cost, greater liquidity and diversification, are known as Listed Infrastructure Funds. An example of a listed infrastructure fund is the ₦5.00 billion closed-ended Chapel Hill Denham Nigeria Infrastructure Debt Fund (NIDF) (which is the Series one (1) of its N200.00 billion Infrastructure Debt Fund Issuance Programme) currently listed and trading on FMDQ.
On the other hand, the unlisted infrastructure funds could either be open- or closed-ended and are usually invested in by private equity investors. Unlisted infrastructure funds are not listed on any exchange, hence have less price volatility.
Attractiveness of Infrastructure Funds
Infrastructure funds offer diverse advantages and opportunities to the capital market as well as to various capital market stakeholder groups such as issuers and investors. To the capital market, infrastructure funds provide an opportunity to deepen market liquidity and expand investible asset alternatives for the investors. This is strategic for the growth of the domestic capital markets through wider participation. To the issuers (which could be the government or corporates), infrastructure funds provide a unique opportunity for mobilising long-term funding (from various sources, including foreign portfolio investments) for strategic infrastructure projects and at a market determined cost. To the investors, infrastructure funds offer relatively attractive long-term returns, opportunity for portfolio diversification, potential protection against inflation, as well as an ability to provide stable cash flows. These potential benefits of infrastructure funds to investors are further discussed below:
▪ Attractive long-term returns: Owing to the essential nature of the services provided by infrastructure assets, they are often designed to allow private owners earn fair returns, so as to incentivise them to keep the facilities in good working order and invest for future growth and modernisation
▪ Portfolio diversification: Infrastructure funds offer investors the diversification opportunity, given that the returns typically have low correlation to other major asset classes (such as equities, real estate, derivatives, etc.). Furthermore, infrastructure funds can invest in global portfolio of listed infrastructure securities, diversified across a wide range of countries and infrastructure sectors
▪ Potential protection against inflation: The pricing (and cash flows) of services rendered by infrastructure assets are often structured to explicitly compensate for any increases in the general price level (inflation). The pricing is determined by the regulators, concession agreements with governments, and long-term contracts, which give the owners powers to adjust the rates (or prices) according to trends in inflation and/or the economy over time
▪ Stable cash flows and economic insensitivity: Because most infrastructure assets enjoy monopoly status, and provide essential services to the markets they serve, demand is often very stable and largely insensitive to economic swings.
Consequently, demand does not materially decline with price increases or during periods of economic weakness
Investment in infrastructure is not risk-free. As such, major risk considerations are as follows:
1. Asset-specific risks – which refer to potential errors in the design, construction and operation of the particular infrastructure assets, and could lead to lower returns or project failure
2. Market risk – which could crystallise when the market demand falls significantly below forecast, or when interest rate environment induces an unprecedented increase in funding cost 3. Political risk – which could materialise when a new government cancels an infrastructure project or significantly changes the operating terms of the project
To invest in infrastructure funds, it is expected that prospective investors must study the fund prospectus (which has details of the fund manager, issuing house(s), trustee(s) to the fund, nature of the fund, credit rating, price, amongst others) in detail and contact qualified advisers for professional advice.
In summary, infrastructure assets provide essential services which are necessary to support economic and social activities. Globally, there is an increasing need for governments worldwide to periodically replace, upgrade and/or build infrastructure assets to meet rapidly expanding demands. The inadequacy of public funds to meet the infrastructure funding gap across various economies opens unique investment opportunities for private and institutional investors through infrastructure funds and other specialist products in the capital market. (Source: FMDQ Spotlight January 2018).
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