There are five key strategies for infrastructure investment, each with varying levels of risk: core, core-plus, value-added, opportunistic, and debt.
1. Core
This strategy targets essential assets with no operational risk and assets that are typically already generating returns. These are usually secondary-stage assets, in developed countries with transparent regulatory and political environments. Key features of the underlying assets include monopoly position, demonstrable demand, and long-term stable cash flows that are forecastable with a low margin for error.
2. Core-Plus
Targeting assets in undeveloped markets, but with little-to-no construction risk. These are usually secondary stage or can be brownfield if in a developed market. These assets may also have higher sensitivity to the economic cycle and may be exposed to fluctuations in demand, although some will include features that act to limit risks, including long-term contracts, long-term government or regulatory price support, and high barriers to entry for competitors.
3. Value Added
This is a moderate-to-high-risk strategy targeting assets that require enhancements. The focus will be in adding value by growing demand for the asset. Assets are typically greenfield or brownfield, potentially involving new or unproven technologies that do not have pricing power at time of investment.
4. Opportunistic
Opportunistic strategies have the highest risk/return profile of the five strategies. Projects targeted will be fairly risky and assets may need to be developed or constructed in their entirety. The focus will be less on generating stable cash flows, and more on achieving capital growth in the value of the underlying asset.
5. Infrastructure Debt
This strategy involves financing infrastructure assets through organizing or acquiring loans secured by those assets. This may include mezzanine debt, preferred equity or senior loans. While the risk exposure of the strategy will depend on the type of debt provided, most infrastructure assets are typically financed by senior debt and have simple capital structures meaning they tend to be relatively low risk.
