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

Unpacking investment risk in superannuation

Survive the next crash by learning from the Stoics

The biggest loss this year in my SMSF portfolio

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

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.