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Risk and Return of Infrastructure Funds Compared to Other Fund Types – November 2014

by Emma Underwood

  • 19 Nov 2014
  • INF

Investing in private infrastructure funds offers investors the potential for long-term, stable and predictable cash flows. Within the alternative assets sphere, infrastructure investments are generally perceived to offer lower risk and accompanying lower returns than other asset classes. Using data available on Preqin’s Infrastructure Online and Performance Analyst online services, it is possible to examine the risk and return trade-off of unlisted private infrastructure funds in comparison to other fund types. Included in the analysis are funds with vintage years between 2001 and 2011.  Returns of each fund type are measured by the median net IRRs, while risk is measured by the standard deviation of the net IRRs.

The chart below plots the risk and returns by fund strategy. Infrastructure funds generate a median net IRR of 9.0%, a higher return than real estate (7.6%), venture capital (6.7%) and fund of funds vehicles (7.6%). Although buyout, distressed private equity, and natural resources funds all generate a higher return, they all carry a higher risk than infrastructure funds, which have a standard deviation of net IRRs of 12.8%. The only fund strategy to have a lower standard deviation of net IRRs than infrastructure is fund of funds (7.9%), which achieve low volatility through investing in a diverse range of underlying funds.

Based on this analysis, the general perception of infrastructure investments as low risk remains accurate, while the return achieved by this fund type outperforms three of the six other fund types included in the analysis. While infrastructure does have a lower return and higher risk profile than private equity, it outperforms real estate returns and carries a lower risk.

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