Alternative Asset Focus: Infrastructure Investments in IRAs
At PENSCO, our clients are always looking for innovative ways to invest using their self-directed IRA accounts. After all, the beauty of a self-directed IRA is that you have the freedom and flexibility to invest the way you want, opening up a whole world of alternative assets like real estate and private equity.
One of the lesser known but fastest growing alternative asset classes out there is infrastructure, or investment in developing projects such as roads, bridges, the electric grid, and water and sewer systems. To better help our clients understand the potential opportunities in this space, I recently caught up with Lynn Greene, CEO of Lucky Corridor to learn more about what retirement investors today should know about infrastructure investing. Here’s what she had to say:
CO: Why would an investor consider infrastructure investments for his or her retirement portfolio?
LG: Infrastructure is a compelling asset class for a couple of reasons. For one thing, development stage projects offer the opportunity for enhanced risk-adjusted returns. Also, there’s a diversification benefit since infrastructure investments are highly uncorrelated with exchange-traded asset classes like stocks and bonds. A well-managed infrastructure portfolio, post-construction, can offer a risk profile similar to government bonds, but with much higher, equity-like returns. Development stage returns can be higher.
CO: How are infrastructure investments able to deliver these potentially higher risk-adjusted returns?
LG: After construction, infrastructure assets are typically backed by long-term, stable contracts and regulatory regimes with highly creditworthy government counterparties. They’re also acyclical, providing essential services that are used at full capacity even during economic downturns. Cash flows are steady and often inflation-linked, providing a natural hedge against currency depreciation.
CO: That definitely sounds compelling. Is this strategy available to all investors?
I think there’s a misconception out there that infrastructure investments are only available to the most elite institutional investors who have exclusive access to a small set of tailored opportunities, but that simply isn’t the case.
It’s true that infrastructure has always been popular among institutional investors. Since it emerged as an asset class in the early 2000s, the world’s largest institutional investors – everything from pension funds to sovereign wealth funds to insurance companies – have invested more than $1 trillion in the space. In fact, Warren Buffett recently announced plans to put $30 billion to work on infrastructure projects in North America.
But more recently, we’re seeing increased interest among accredited individual investors, particularly those who are familiar with the self-directed IRA option. With a self-directed IRA, accredited investors can use retirement dollars to buy these investments, gaining the tax benefits of a qualified account. When you add that to the potential advantages of an investment in infrastructure, it can be a powerful combination.
CO: And what about inventory – are there enough infrastructure opportunities out there to choose from?
LG: The good news for investors is that demand for infrastructure investments is on the rise. A recent McKinsey report found that by 2030, an estimated $57 trillion of new infrastructure investment would be needed globally in order to keep up with projected GDP growth – an increase of more than 60% over the previous 18 years. And with new federal policy in the US requiring states to cut carbon emissions by up to 30% within the next 15 years, a substantial investment in renewable energy infrastructure will be required.
For example, development-stage renewable energy infrastructure projects like Lucky Corridor offer a unique way for accredited investors to access this new and growing market. Based in New Mexico, our company is currently building two electricity transmission projects, which will connect one of American’s strongest wind and solar energy resource areas to the Western grid. Together, the two transmission lines would provide 880MW of renewable energy to the grid and create up to 3000 jobs in rural areas of New Mexico that have high unemployment.
CO: So how can accredited investors identify and invest in these infrastructure opportunities?
LG: As demand for infrastructure assets goes up, a growing number of platforms are popping up to help connect accredited investors with infrastructure and other alternative opportunities. One example is Zanbato, which offers qualified investors access to a small selection of unique and highly compelling investment opportunities in infrastructure and other asset classes.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.