The investment industry for many years has offered different securities to an investor; ranging from equities, commodities, currencies and fixed incomes. These securities have all contributed to what the financial market is today. In addition to the fixed income class of asset which had popular securities like Government Bonds, Commercial Papers, Treasury Bills and Corporate Bonds to mention a few, there is a newly rising form of securities which looks more profitable to the fixed income investors – the infrastructure debt. An infrastructural debt, as its name sounds, is a form of debt that is primarily invested in infrastructures, and it is also unarguably long-term. For a start, most infrastructure investors are primarily attracted to the fact that the underlying infrastructural project will yield a huge return on investment. The reason for this is because the investment projects are essential public goods that are bound to yield profitable returns, e.g., Airports, Renewable Energy and Water Dams.
The infrastructural debt is a new area of interest for most institutional investors, mostly the pension funds managers, as the infrastructural debt help to provide investors with the opportunity for generating a high yield and longer-term cash flows. Investors have started giving this security more attention for a number of reasons which seems necessary to be listed out. Some of the benefits the infrastructure debt has offered investor which made it the newly sought out for investments are:
Lower Risk: Compared to the other forms of securities which come with some forms of risk, the infrastructure debt has historically proven to have a low exposure to the risk of default and any other forms of risk that could potentially affect most securities.
An Opportunity to Diversify: The infrastructure debt has now helped most fund managers diversify the portfolio of investors in a way that has reduced the negative return that could be coming from other securities in the portfolio.
With infrastructure debt in the investment vehicle, you can rest assured that your money is safe and better return can be well assured. Longer Investment Duration: Institutional Investors like the insurance companies and pension managers appreciate the infrastructure debt better because it helps them meet their longer-term liabilities. Infrastructure debt has been designed to have long-term duration, usually a period of 30-50 years, and this is more suitable for the institutional investors who will be paying back their managed funds around such periods – making their return alongside. A Higher Return: In contrast to the basic principle of finance which states that "the higher the risk, the lower the return," infrastructure debt has decided to flip the rule upside down. Most fixed income like the corporate and government bonds are known to come with a lower risk of default; hence a lower return compared to variable incomes like equity. The yields return that comes from the infrastructure debt is actually higher than the other securities in its class.
These aforementioned characteristics of the infrastructure debt have made it a recommended investment offer to other investors apart from the large players who have been dominating this space. So apart from the banks, insurance companies, and pension funds, you as an individual can also benefit from investing in infrastructure debts. THE STEPS TO MAKING MONEY FROM INFRASTRUCTURE DEBT Do a feasibility research: The first step is to study the market and search for the list of infrastructural project that accepts a private investment. It may be important to know at this point that there are some projects that do not allow individual investors contribute their funds – knowing the list of those private investments will help you analyze those investments that look fit in into your investment objectives. Familiarize yourself with the duration and return: The infrastructural investments have different durations, hence, their varied returns. It is essential to take note of this in mind to select the project that will refund your investment in the period where you want to cash out.
Identify the political risk: The sole and major risk that is opened to the infrastructural debt investment is political in nature. Investing in a state that has a higher risk of default should be avoided. There is a caveat here – it should be noted that one of the characteristics of a sovereign state is the low default risk on borrowed funds. This is because, in a real-world scenario, all government investments are risk-free.