Private equity, private debt and infrastructure investing are popular with institutional investors because payoffs complement the publicly traded parts of portfolios.

Private equity and debt describe securities not traded on public exchanges and negotiated between the investor and the company receiving funds. Including leveraged buyouts, these allow investors to structure terms and conditions tailored to their needs.

Consider an insurance company looking to offset long-dated liabilities. Private-equity investors occasionally negotiate spots on the company’s board, and can help make ideas successful.

In 2012, North American private equity buy-out deal flow was $152.3 billion, a post-Lehman high according to Preqin, an alternative assets data provider. Retail investors can access private equity and debt via a handful of U.S. companies, and public and private closed or open-ended funds.

There are two exchange-traded notes (ETNs) in the U.S. offering exposure to business development companies. ETNs, like ETFs, offer exposure to an index (Wells Fargo Business Development Company Index in Table 1).

However, unlike ETFs, they’re structured as debt obligations that bear credit risk (UBS’s credit risk in the case of the examples in Table 1). A redemption fee may also be levied. Note the leveraged version seeks to replicate the return of the underlying index on a monthly basis, rather than daily. Also, both ETNs have the same expense ratio (0.85%). The yields reflect the impact of leverage: BDCS’s dividend yield is 6.98% and BDCL’s is 12.87%.

Stable demand

Infrastructure investing is a form of equity or debt financing for businesses involved in permanent assets that relate to rudimentary components of an economy, such as transportation, energy, and utilities. Some businesses have monopoly-like characteristics and are regulated (e.g., hydroelectric plants), but generally the common feature is stable demand.

The idea is to translate stable demand into cash flow that investors need to offset a particular liability, such as a pension. There are three infrastructure ETFs trading in Canada (see Table 2) and seven in the U.S. (see Table 3).

Infrastructure ETFs may include shares of companies involved in infrastructure projects. Engineering and construction companies that perform infrastructure work, such as Chicago Bridge & Iron Co. NV, Fluor Corp. and SNC-Lavalin Group, are included in these ETFs, although the return profile is that of an industrial firm subject to the capital spending cycle.

Energy and pipeline companies such as Enbridge, Kinder Morgan, TransCanada Corp. and Duke Energy Corp. may also be included. These ETFs are exposed to the infrastructure cycle, but don’t necessarily have the risk characteristics institutions seek in private deals.

Some investors focus on the yield possibilities of these instruments, but the risk characteristics are more important to portfolio building. Table 4 shows the five-year volatility of various infrastructure indices compared with the S&P 500 and MSCI World indices. This includes one- and five-year returns, which struggled following the financial crisis. However, infrastructure indices have had lower volatility than broad equity indices in the global and U.S. regions.

Should you invest?

Private equity and infrastructure investing will continue to be popular with institutional investors. Although more expensive, U.S.-traded business development company index ETNs are closer to institutional infrastructure vehicles than other exchange-traded products in the capital spending cycle. Lower volatility make these vehicles interesting.

Thanks to Mark Weisdorf, managing director, CEO of J.P. Morgan Asset Management’s Infrastructure Investments Group in New York and R. Waghela of J.P. Morgan in London for providing statistics.

Table 1. U.S.-Traded Private Equity ETNs

U.S.-traded Private Equity ETNsSymbolDiv YieldExpenses
UBS E-TRACS Wells Fargo Business Development Company IndexBDCS6.98%0.85%
UBS E-TRACS 2XLeveraged Long Wells Fargo Business Development Company IndexBDCL12.87%0.85%

Table 2. Canadian-Traded Infrastructure ETFs

Canadian-traded Infrastructure ETFsSymbolDiv YldExpenses
BMO Global InfrastructureZGI3.11%0.55%
iShares S&P Global WaterCWW2.31%0.60%
iShares Global InfrastructureCIF2.82%0.65%

Table 3. U.S.-Traded Infrastructure ETFs

U.S.-traded Infrastructure ETFsSymbolDiv YldExpenses
iShares S&P Global InfrastructureIGF4.02%0.48%
SPDR FTSE/Macquarie Global Infrastructure 100GII3.19%0.59%
iShares S&P Emerging Markets InfrastructureEMIF2.87%0.75%
Powershares Emerging Markets InfrastructurePXR1.56%0.75%
Emerging Global Shares INDXX Brazil InfrastructureBRXX5.62%0.85%
India InfrastructureINXX1.22%0.85%
Emerging Global Shares INDXX China InfrastructureCHXX2.45%0.85%

Table 4. Broad Market and Infrastructure Index Volatility

1-Year Return 20125-Year Annualized Return5-Year Index Volatility
S&P 500 (USD)13.4%-0.6%24.2%
MSCI World Index (USD)13.2%-3.4%26.6%
MSCI USA Infrastructure Index9.3%1.9%18.7%
MSCI World Infrastructure Index6.1%-2.3%16.7%
Macquarie U.S.A. Infrastructure Index-1.0%-1.9%19.4%
Macquarie Global Infrastructure Index1.2%-7.1%16.8%