Unlisted infrastructure: on track for a record year

Good quality infrastructure is needed for any society to function effectively. Energy supply, water, roads, railways and airports are all essential services used by the public every day.

Certain types of infrastructure can be decades, or even centuries old. However, responsibility for construction and maintenance has traditionally been in the domain of the public sector, be that national or local government, or possibly supranational organisations such as the European Union. Only relatively recently has infrastructure opened up into an investable asset class.

Since infrastructure became accessible to private investors, its popularity has grown almost exponentially. Last year, global fundraising for privately owned or ‘unlisted’ infrastructure projects reached a new record level. According to Preqin, a specialist research firm, capital inflows in 2018 reached $85 billion1.

Why is investment in infrastructure so popular?

Unlisted infrastructure has several attractive characteristics.

  • Diversification and low correlation to traditional asset classes
    Since these assets usually don’t trade on listed markets, their valuations are not subject to daily price fluctuations and performance isn’t linked with that of daily-traded assets like equities and bonds. This tends to result in lower volatility and can bring diversification benefits for investors.
  • Reliable cash flows
    With their steady income streams, typically underpinned by long-term contractual frameworks, infrastructure assets tend to produce stable and predictable cashflow profiles. This makes them attractive investments for long-term investors, particularly those seeking attractive yields from day one.
  • High barriers to entry
    Infrastructure assets are often natural monopolies, providing essential services to the public. Significant start-up costs can combine with technological and regulatory forces to protect them from competition.
  • Inflation protection
    Cash flows in infrastructure projects often have a degree of inflation protection. Long-term investors who are looking for real (i.e. inflation-adjusted) returns view this as another attractive characteristic.
  • Attractive risk-adjusted returns
    The infrastructure asset class offers investors the potential to invest across the risk spectrum to meet their specific return requirements. Opportunities range from lower-risk assets, which are not linked to gross domestic product growth (e.g. regulated utilities), to those with exposure to the macroeconomic cycle, such as car parks.

Getting to the core

At Aberdeen Standard Investments (ASI), we offer direct investing capabilities across the asset class, encompassing both concession and economic infrastructure. While my colleagues on the concession side of the business look at assets typically underpinned by governmental contracts, the economic infrastructure team invests in assets that fall within the ‘core’ or ‘core+’ definition of infrastructure.

What this means is that we don't typically invest in projects at the riskier end of the spectrum. We believe these types of investments are better suited to private equity-style investors who have a higher risk/return objective and a shorter time horizon. Instead, we prefer to make long-term investments in essential services that possess all those attractive characteristics listed above.

Usually, this relates to regulated utilities such as gas and electricity distribution, transportation assets such as rolling stock and energy assets with long-term, contracted cash flows, such as midstream energy assets. We believe that these assets, together with our responsible ownership philosophy, create an attractive investment opportunity for the long-term investor.

Too much capital?

Given its attractive characteristics, large inflows of capital have come into the asset class in recent years from financial investors, direct pension funds and sovereign wealth funds. Competition for assets has increased and potential returns have been squeezed. This effect has been particularly pronounced with larger-scale projects whereby investors with large capital bases have focused on what we would define as ‘trophy’ assets. London City Airport, which traded a couple of years ago at a reported 40 times its pre-tax earnings, is a good example.

While we are not in a position to question the attractiveness of such deals, there is no doubt that there has been a return compression in this area of the market. Emphasis is often being placed on significant growth expectations, which may or may not come to pass. Either way, such investments do not fall within our definition of ‘core infrastructure’, owing to the potential risks involved.

Amid the significantly greater competition at the large size end of the infrastructure market and the associated dynamics previously outlined, we choose to focus on the smaller and middle parts of the market. In this segment, there is a relatively lower level of competition due to the larger deal-opportunity pool, which allows investors to exercise stronger price discipline, while being able to continue to systematically deploy capital. Moreover, this end of the market tends to be more fragmented, with opportunities often not widely marketed to potential buyers. In this sphere, we have also learnt that successful partnerships often result in successful infrastructure investments.

1Preqin 2018 Fundraising Update, January 2019.

Case study : ASI’s partnership with Rock Rail

We have an exclusive partnership with Rock Rail, a specialist rolling-stock development company, to procure and lease trains to operators of UK passenger trains. Given that the average age of UK rolling stock is approximately 30 years, there is a desire to upgrade passenger fleets via private-sector involvement. Operators of trains tend to be asset-light businesses. They make money selling tickets and have little interest in owning trains. This provides an opportunity for businesses like ours to play a role in bringing competition to the UK infrastructure market for the benefit of the end consumer.


The UK’s railways were privatised in the mid-1990s. This involved splitting ownership of the track, the trains and the operations between different parties. Currently, the track system is the responsibility of Network Rail (before that the ill-fated RailTrack plc was in charge). Rolling-stock operating companies (ROSCOs) owned the trains and leased them to Train Operating Companies (TOCs) under a series of franchise arrangements. Until recently, it was much more lucrative for the ROSCOs to extend the life of a particular train by refurbishing it rather than replacing it.

Eventually, however, the government modified and improved the system. Operators taking on a new franchise had an obligation to introduce new rolling stock. This decision signalled an opportunity for ASI, together with Rock Rail, to step into the market. With operators obliged to buy new trains, we set about offering them a fresh and alternative financing solution.

Forming the partnership

Establishing our credibility in this new market required significant investment of time and money. Taking three years to develop, the partnership brings together the complementary skill sets of our two businesses. Between the two partners, we offer industry expertise, project and asset management, debt and equity raising, transaction structuring, stakeholder management and responsible governance.

Having jointly developed the concept and built credibility in the market, we convinced both the operators and the Department for Transport that the partnership would work and represented excellent value for money.

The outcomes

The first results of our partnership – 25 Siemens trains, worth c. £300 million – have just become tangible to the UK general public. They have recently gone into service, replacing a fleet of 43-year-old trains running out of London’s Moorgate Station. We believe they will make a real difference to peoples day-to-day lives. The deal’s success allowed us to secure two subsequent transactions for two much bigger fleets for East Anglia and South Western, worth c. £700 million and c. £1,000 million respectively.

Long-term benefits

The improvements we have been able to make to the quality of the UK’s rolling stock are significant, and demonstrate the best qualities of putting at-risk capital to work in a partnership.

Opportunities ahead

We are excited to have the opportunity to invest in assets which are often deemed essential public services. Given the nature of such assets, we take our responsibility and role in this regard seriously, and focus much of our attention on responsible investing and stakeholder management. Our hands-on approach to asset management encompasses independent oversight of each asset, and draws on the experience of third-party expertise to supplement our own team’s skillset.

Although capital flows have increased within the infrastructure asset class in recent years, much of this capital is focused on the large, ‘trophy’ end of the market where competition is more acute. By contrast, we think there are a large number of opportunities in the middle part of the market for investors who have the patience to hold investments for the long term, and are willing to work hard to find interesting transactions. Our focus remains on low-risk, smaller transactions, which can deliver steady, stable returns to investors, throughout the economic cycle.


The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.