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Investment risks

The risks of an investment in infrastructure may be generally divided into those specific to the infrastructure asset and those affecting the broader asset class. The asset specific risks encompass risks pertaining to the design, construction and operation of the infrastructure asset while the asset class risks include economic risk and regulatory and political risk.

Asset specific risks largely depend on the maturity of the particular asset. In the construction phase, there is considerable risk associated with the construction process, such as the construction period, budget overruns and the like. Importantly, a key feature of infrastructure assets is that as an asset matures, its risk profile declines and its valuation increases, all other things remaining equal. GAIA will invest in operational or near-operational assets to mitigate the construction risk on the asset.

Of the more generic risks affecting the infrastructure asset class, the most pertinent is interest rate risk. The prevailing level of interest rates can have an impact on the discount rates applied to the valuation of infrastructure investments, and on the debt portion of the investment structure; such that as interest rates rise, the valuation of an infrastructure investment will generally fall. This is generally a short-term phenomenon. Over the medium to longer-term, this initial fall in value is mitigated as revenue from the underlying asset grows. Generally, revenue increases are derived from CPI linked pricing increases and the volume increases that occur in a growing economy.