It is generally perceived that investing in private infrastructure funds offers long-term, stable and predictable cash flows, with lower risk and accompanying lower returns than private equity and real estate. In order to examine these perceptions we can compare the risk and returns trade-offs of the main private equity fund types using data from Preqin’s Infrastructure Online service, which contains fund level performance data for over 150 infrastructure vehicles. The analysis looks at funds with vintage years between 2001 and 2011 with the returns of each fund type being represented by the median net IRRs and the risk measure by the standard deviation of the net IRRs.
By examining the risk and returns by fund strategy, infrastructure funds generate a median net IRR of 8.7%, and a standard deviation of net IRRs of 14.5%. In comparison, buyout funds generate a median net IRR of 11.3% and a standard deviation of returns of 17.4%, showing that while Infrastructure funds generate lower returns in general, they also have lower levels of risk attributed them. On the other hand, while real estate funds show higher risk, reporting a standard deviation of 17.7%, the returns generated by the strategy are 6.9%, lower than those generated by infrastructure funds.
The spectrum of risk and returns trade-offs when making comparisons of the risk and returns by different fund types is a result of the varying characteristics of the different investment strategies. The infrastructure asset class has grown rapidly in the last decade, attracting billions of dollars of commitments every year, as investors recognize the opportunities to be found in the increased need for infrastructural developments across the world, in line with economic growth and population increases.