Serkan Altay Explore How Infrastructure Funds Can Boost Foundations Portfolio Performance

Infrastructure funds have become a cornerstone for foundations and endowments, offering a blend of stability, income, and alignment with mission-driven goals. By channeling investments into essential sectors like renewable energy, transportation, and utilities, these funds provide a robust solution for institutions seeking to balance capital preservation with societal impact. This article explores how infrastructure funds enhance portfolio construction for foundations, focusing on risk management, diversification, and the strategic role of these assets in building resilient portfolios. According to investment expert Serkan Altay [https://www.crunchbase.com/person/serkan-altay-e355], infrastructure strategies play a pivotal role in shaping sustainable, long-term institutional portfolios.

Foundations prioritize portfolios that generate consistent income to fund grants without depleting principal. Infrastructure funds excel by focusing on mature, operational assets, avoiding the volatility of development stages. For instance, a fund may rally assets heavily in solar (about two-thirds of holdings), onshore wind, and battery storage, securing cash flows through long-term contracts with creditworthy counterparties like governments or major corporations. This approach delivers net annual returns of 10-12%, primarily through current income distributed monthly, meeting liquidity needs. By selecting assets with proven technologies from reputable manufacturers and long useful lives, funds align with endowments' perpetual horizons. CPI-linked contract escalators further protect against inflation, ensuring real returns remain robust.

Diversification is a key advantage of infrastructure funds. These investments exhibit low or negative correlations with traditional equities and bonds, reducing portfolio risk. A private infrastructure portfolio shows a correlation of just 0.41 to regional equities (e.g., MENA markets) versus 0.86 for global equities, with minimal ties to debt markets. This low correlation, combined with recession-resistant cash flows from essential services, shields portfolios from market cycles and GDP fluctuations. Historical data indicates that a private rally of assets in infrastructure has lower volatility as measured by annualized standard deviation, compared to public markets or equities, thereby enhancing Sharpe ratios. By incorporating these assets, foundations can reduce risk while boosting returns, a critical edge for long-term capital stewardship. This becomes even more relevant in light of foundations' disbursement requirements.

Liquidity is vital for foundations, and infrastructure funds provide flexibility through open-ended, perpetual-life structures with monthly subscriptions and quarterly redemptions (with fees like 2% in the first year). This minimizes the J-curve effect, ensuring investments generate income quickly. Fees (0.2% administration, 1.25% management, and performance incentives (e.g., 12.5% over a 5% hurdle) align interests but require scrutiny against net yields. Allocating across geographies, primarily North America (70-100%) with selective European exposure, and focusing on stable sectors like renewables strengthens risk mitigation.

Risks persist in infrastructure investments. Newer funds may lack operating history, and firms managing vast portfolios (e.g., $484 billion, with $129 billion in real assets) may face conflicts from overlapping investments. Policy shifts, such as expiring renewable energy tax credits, can also impact returns. Foundations must conduct thorough due diligence to ensure alignment with ESG mandates and risk profiles.

The performance of listed versus private infrastructure funds highlights distinct characteristics that foundations must weigh. Listed infrastructure funds, which invest in publicly traded companies in sectors like utilities or transportation, offer daily liquidity and transparency but are more exposed to market volatility. Private infrastructure funds, focusing on direct ownership of unlisted assets, often deliver higher returns with lower volatility, albeit with reduced liquidity. Between 2022 and 2024, private funds achieved cumulative returns of 30.3%, significantly outpacing listed funds' 9.2%. This outperformance stems from private funds' ability to capture illiquidity premiums and actively manage assets, such as optimizing renewable energy projects for efficiency. However, listed funds can shine in specific market conditions; for instance, in Q2 2025, they outperformed broader public equities, capitalizing on market recoveries. Over longer periods, such as 15 or 20 years, returns between listed and private funds tend to converge, with listed funds benefiting from their ability to adjust quickly due to liquidity. At the end of 2023, listed infrastructure traded at a 30% discount to private valuations, the widest gap since 2011, suggesting potential undervaluation in public markets. Private funds, with their lower correlation to economic cycles (often below 0.4), provide more stable returns, particularly for long-term trends like decarbonization, while listed funds are more sensitive to stock market sentiment.

Incorporating open-ended private infrastructure funds into a globally diversified portfolio can significantly enhance risk-adjusted returns. These funds, which allow continuous subscriptions and redemptions without a fixed term, provide access to illiquid assets while addressing some limitations of closed-end structures, such as prolonged capital lockups or the J-curve effect. Historically, private infrastructure has delivered higher returns with lower volatility than public equities, reducing overall portfolio risk. With correlations to stocks and bonds ranging from 0.2 to 0.4, these funds offer robust diversification, driven by stable, contract-backed cash flows from essential services. This stability provides downside protection during economic downturns and acts as an inflation hedge through CPI-linked revenues. Allocating 10-20% to open-ended private infrastructure can improve portfolio Sharpe ratios by 0.1-0.3 points, capturing growth from megatrends like renewable energy transitions without the full market risk of equities. Their perpetual-life structures and lower fee schedules compared to closed-end funds align with foundations' long-term horizons, enabling consistent capital deployment and enhanced performance. By blending private infrastructure with other asset classes, portfolios achieve reduced drawdowns during volatile periods, such as those seen in 2022, and support long-term compounding for perpetual capital pools.

Some open-ended infrastructure funds incorporate a liquidity sleeve, allocating 10-15% of their assets to marketable securities like short-term bonds, cash equivalents, or listed infrastructure stocks. This feature enables quick redemptions, often within a quarter, without disrupting the core illiquid holdings, addressing foundations' need for periodic liquidity to fund grants. For example, a fund might hold treasury bills or infrastructure ETFs as a buffer, covering 10-15% of net asset value, allowing managers to meet withdrawal requests promptly while maintaining exposure to high-yield assets. This liquidity mechanism minimizes the need for forced sales of private assets during market stress, enhancing portfolio resilience. Such funds balance the illiquidity premium of private infrastructure with investor flexibility, making them ideal for diversified portfolios. By integrating these liquid assets, funds can manage volatility and limit downside risk, ensuring alignment with foundations' strategic rebalancing needs.

In conclusion, infrastructure funds offer a strategic allocation for foundations, delivering diversified, resilient portfolios with stable income and downside protection. With global infrastructure needs projected at $9 trillion annually through 2050, driven by decarbonization and digitization, these funds align financial returns with societal impact. As highlighted by financial strategist Serkan Altay [https://medium.com/@serkanaltayrallyassets/about], a well-structured infrastructure allocation enables foundations to pursue sustainability, income stability, and long-term impact simultaneously. By executing a thoughtful allocation of investments, incorporating both listed and private infrastructure, including open-ended funds with liquidity features, foundations can navigate economic uncertainties while advancing missions tied to sustainability and community welfare, making infrastructure a vital pillar for endowment portfolios.

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