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.

 

  •   26 September 2014
  •      
  •   

 

Leave a Comment:

RELATED ARTICLES

Australia has saved $4.5 trillion for retirement. Here's what matters more

One risk after another

Unpacking investment risk in superannuation

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Will investors be better or worse off under new housing tax changes?

Housing tax reforms have sparked warnings of market turmoil and promises of greater fairness. But after modelling nearly two decades of property data, the results suggest winners and losers may not be who many investors expect.

Latest Updates

SMSF strategies

Division 296: the initial moves to make before the windows close

What if the best superannuation strategy isn't about earning more, but acting before your options disappear? Several overlooked planning windows are narrowing, with consequences that can last for decades.

Planning

Avoid unnecessary CGT with this estate planning clause

A simple estate plan can create a ticking time bomb. One overlooked clause can pit spouses against children, delay inheritances, and potentially leave a family facing an unexpected tax bill worth hundreds of thousands of dollars.

Exchange traded products

The hidden trade-off in fixed income ETFs

Some investment trade-offs are immediately visible. Others are embedded in the way a portfolio is constructed. Understanding the difference may explain why similar-looking investments can produce surprisingly different results.

Retirement

The mortgage free retirement is fading

What happens when a generation reaches retirement carrying obligations previous generations largely avoided? New research suggests we may need to rethink both how much we need in retirement and what life could look like.

Retirement

The key question to inspire a confident and purposeful retirement

Most people spend decades planning for retirement. Far fewer plan for what happens when they get there. The difference may explain why so many find the transition harder and less fulfilling than expected, despite careful preparation.

Latest from Morningstar

Making the case for a 'good enough' portfolio

Some investors spend years chasing the perfect strategy. Others choose a path that’s simply good enough and move on. Which approach is more likely to deliver both better outcomes and a happier financial life over the long run?

Investment strategies

Is the US market as expensive as CAPE says?

Many investing ideas survive for decades. But that does not make them right. A famous valuation measure implies that US shares are dangerously expensive, but the evidence may point to a very different conclusion.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 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.