Institutional investors typically target private infrastructure funds with the aim of generating long-term, stable and predictable cash flows. Private infrastructure funds typically have a lower risk/return profile than private equity and most private equity real estate funds. Using the data available on Preqin’s Performance Analyst and Infrastructure Online, the risk/return trade-off of unlisted private infrastructure funds can be examined in comparison to other fund types. The analysis looks at funds with vintage years between 2002 and 2012, with the returns of each fund type being represented by the median net IRRs and the risk measured by the standard deviation of the net IRRs.
The chart below plots risk and returns by fund strategy. Infrastructure funds generate a median net IRR of 4.7%, a higher return than venture capital (2.8%). Although buyout and real estate funds generate a higher return, they also carry a higher risk than infrastructure funds, which have a standard deviation of net IRRs of 13%. The only fund strategy to have a lower standard deviation of net IRRs than infrastructure is mezzanine (5.3%); mezzanine vehicles also outperform infrastructure funds with a median net IRR of 8%.
Based on this analysis, the perception of infrastructure funds as low risk remains accurate. While infrastructure does have a lower return and higher risk profile than mezzanine vehicles, it outperforms venture capital returns and carries a lower risk than real estate, buyout and venture capital strategies.