Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 81

Infrastructure debt and infrastructure equity

This article follows on from Gerald Stack’s excellent article for Cuffelinks comparing listed and unlisted infrastructure, and looks at the choice between investing in the equity or debt part of the capital structure.

Investors in infrastructure are generally seeking:

  • returns driven by the underlying long term cash flows (ie yield-focussed rather than growth-focussed returns)
  • capital stability
  • some degree of inflation protection or inflation linkage. Typically underlying revenues of infrastructure assets are linked to inflation and, hence, infrastructure assets offer the prospect of inflation protection.

By definition, equity and debt sum to the value of the asset (or equivalently, the value of equity is the value of the asset minus the value of debt). This means that the characteristics of underlying infrastructure businesses feed through to the characteristics of infrastructure debt and equity investments.

Infrastructure equity:

  • receives a disproportionate share of the upside in performance of the underlying infrastructure business
  • is more impacted by adverse developments through the impact of leverage
  • must consider the cost and availability of debt finance - during the GFC many of the sharp falls in infrastructure share prices were driven by this factor, rather than by declines in the operating cash flows of their underlying businesses
  • benefits from control and directly or indirectly is responsible for the management of the asset.

Infrastructure debt:

  • has lower returns (on average) and doesn’t participate in the upside of underlying infrastructure asset
  • is much less risky (see below)
  • is a shorter term investment – with terms to maturity typically 3-7 years. In contrast, infrastructure equity is a very long term investment as assets are usually valued based on cash flow models that go for more than 30 years
  • doesn’t necessarily benefit from the same inflation protection as the underlying asset – particularly in the case of fixed rate bonds. However, many projects issue floating rate debt where interest payments move with bank bill rates (a rise in inflation would be expected to flow through to higher bank bill rates) or inflation-linked bonds (where interest and principal payments are directly linked to CPI).

There are lots of different ways to think about risk. But one way of comparing the risk of infrastructure debt and equity is to look at the performance of listed infrastructure stocks that had floating rate bonds on issue through the GFC. While this is a small sample, only four assets, during severe market disruption, it does allow the comparison of risk outcomes between debt and equity in the same underlying asset.

Depending on whether you focus on standard deviation or worst 12 month return, this analysis argues that senior floating rate debt is 4-10 times less risky than equity in the same asset. Of course, this comes with a return trade off.

Just as infrastructure equity has listed and unlisted forms of investment, different types of infrastructure debt (loans versus publicly-traded bonds) have differing levels of liquidity and, hence, illiquidity premia.

Which is the better investment? Ultimately that depends on relative pricing and risk-adjusted returns, as well as the time horizon and risk appetite of investors. However, many investors tend to think purely of infrastructure equity when considering infrastructure investments and it may be worth thinking more broadly.

 

Alexander Austin is Chief Executive Officer of Infradebt. Infradebt is a specialist infrastructure debt fund manager. This article provides general information and does not constitute personal advice.

 


 

Leave a Comment:

RELATED ARTICLES

Survive the next crash by learning from the Stoics

The biggest loss this year in my SMSF portfolio

Stocks are less risky than bonds in the long term

banner

Most viewed in recent weeks

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

What to expect from the Australian property market in 2025

The housing market was subdued in 2024, and pessimism abounds as we start the new year. 2025 is likely to be a tale of two halves, with interest rate cuts fuelling a resurgence in buyer demand in the second half of the year.

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Howard Marks warns of market froth

The renowned investor has penned his first investor letter for 2025 and it’s a ripper. He runs through what bubbles are, which ones he’s experienced, and whether today’s markets qualify as the third major bubble of this century.

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

The 20 most popular articles of 2024

Check out the most-read Firstlinks articles from 2024. From '16 ASX stocks to buy and hold forever', to 'The best strategy to build income for life', and 'Where baby boomer wealth will end up', there's something for all.

Latest Updates

Investment strategies

The perfect portfolio for the next decade

This examines the performance of key asset classes and sub-sectors in 2024 and over longer timeframes, and the lessons that can be drawn for constructing an investment portfolio for the next decade.

Shares

The case for and against US stock market exceptionalism

The outlook for equities in 2025 has been dominated by one question: will the US market's supremacy continue? Whichever side of the debate you sit on, you should challenge yourself by considering the alternative.

Taxation

Negative gearing: is it a tax concession?

Negative gearing allows investors to deduct rental property expenses, including interest, from taxable income, but its tax concession status is debatable. The real issue lies in the favorable tax treatment of capital gains. 

Investing

How can you not be bullish the US?

Trump's election has turbocharged US equities, but can that outperformance continue? Expensive valuations, rising bond yields, and a potential narrowing of EPS growth versus the rest of the world, are risks.

Planning

Navigating broken relationships and untangling assets

Untangling assets after a broken relationship can be daunting. But approaching the situation fully informed, in good health and with open communication can make the process more manageable and less costly.

Beware the bond vigilantes in Australia

Unlike their peers in the US and UK, policy makers in Australia haven't faced a bond market rebellion in recent times. This could change if current levels of issuance at the state and territory level continue.

Retirement

What you need to know about retirement village contracts

Retirement village contracts often require significant upfront payments, with residents losing control over their money. While they may offer a '100% share in capital gain', it's important to look at the numbers before committing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.