Much of the infrastructure we rely on in our urban centres are still in use beyond their useful life. The American Society of Civil Engineers estimates that the median expected lifespan of physical infrastructure to be about fifty years. A lot can change in that period of time. Over the last fifty years, the US population has increased by 59% and GDP (inflation-adjusted) increased 272%. Countless innovations have come to pass and facilitated modern life but roads, airports, sewer and water systems are still in use decades after the end of their projected life spans and are aged and decaying. Climate change has compounded the process of decay. Over the last 50 years, global temperature rose at an average rate of about 0.13°C per decade – almost twice as fast as the 0.07°C per decade increase observed over the previous half-century. The world had its warmest August in at least 174 years, increasing the odds that 2023 will go down as one of the hottest years on record. As weather grows more severe, old vulnerabilities continue to worsen and new ones are exposed.

Given the demands of a larger population, increased productivity and a harsher climate, it is unfathomable that we have chosen to defer the replacement of critical public assets. The oft-cited reason for deferring infrastructure spending is the ballooning national debt, but Summers pointed out that just a 1% increase in infrastructure spending would actually spur GDP growth such that debt to GDP would actually decrease.

Despite being an identified area of dire need for many years, meaningful action was not taken on bridging the infrastructure gap at the national level until President Biden passed the Infrastructure Investment and Jobs Act in November 2021 to renew existing infrastructure over the next decade. The bill is expected to address known infrastructure gaps across the country where the need is highest and specifically mentions:

Given the prolonged period of underinvestment, it follows that the current opportunity to invest in renewing infrastructure is generational. Governments and their constituencies have come to embrace private investment in public infrastructure as a viable funding strategy – and there has never been so much private capital earmarked for infrastructure renewal. The asset class is large enough to absorb the capital and deploy it into assets that produce stable, inflation-indexed returns over the duration of the assets’ useful life which, at a median of about fifty years, is unmatched by most other asset classes.

The drinking water infrastructure system in the US consists of 2.2 million miles of pipes, with much of it buried deep under cities. The American Society of Civil Engineers estimates that a water main break occurs every two minutes and an estimated 6 billion gallons of treated water is lost each day. Facing failing infrastructure, an aging workforce, and increasingly stringent water quality and environmental mandates, a growing number of municipal governments no longer want to run their own water and wastewater utilities. The voluntary sale of municipal water and wastewater systems to dedicated water professionals is a proven way for local governments to access the resources and expertise needed to address their water utility challenges. Essential Utilities (“Essential”) is a Pennsylvania-based company that is consolidating the market for local water utilities. Municipalities that are unable to comply with state and federal regulations can voluntarily sell their water and wastewater as an effective way to offload risk, monetize assets, and focus resources on other local needs. After Essential completes an acquisition, it invests the necessary capital to bring the system’s infrastructure up to standard while also optimizing operations. State utility commissions allow Essential to earn a fair return on their capital through a regulated rate setting process. While customers ultimately bear the cost of infrastructure upgrades, Essential’s expertise and efficiency has enabled it to deliver cost improvements such that some customers have seen their water rates fall by as much as 40% even as the major infrastructure upgrades were implemented. Since 2015, Essential has increased their customer base by almost six-fold. Significant runway for privatizations remains as about 75% of water utilities are still publicly-owned.

HIGHWAYS

As urban areas become more congested, governments are increasingly turning to the private sector for creative solutions to increase mobility in their cities. Ferrovial specializes in building and operating highly complex transportation infrastructure projects for fast-growing urban centres. Its main assets historically were a 43% stake in the 407 ETR toll road in Toronto and a 25% stake in London’s Heathrow Airport. More recently it has been building out ‘Managed Lanes’ in the US, which are express toll lanes within an existing public highway. These lanes are convenient for drivers as it allows them to make a real-time decision to bypass congestion without having to make a significant detour. Tolls on Managed Lanes are adjusted every five minutes to optimize traffic flow on the entire highway and maintain a minimum speed of 50 miles per hour in the toll lanes. Managed Lanes solve traffic congestion problems by allowing their users to save time, have certainty in their daily commutes and increase the economic productivity of their regions of influence. Ferrovial’s first two Managed Lanes assets in Texas generated earnings growth in excess of 30% compounded annually from 2015 to 2019 while the average trip cost users only $3.50 and 90% of trips were less than $10. Ferrovial has completed construction on three new managed lane assets over the past year in Charlotte, Virginia and Texas. After investing in building out this portfolio over the past five years to six Managed Lane assets, Ferrovial is entering a harvesting period during which the cash flow produced by these assets is expected to rise substantially through the end of the decade.

AIRPORTS

No US airport is currently ranked in the Top 10 globally by SkyTrax, a UK-based air travel consultancy². Even prior to the pandemic, flight delays were increasingly problematic. In 2019, 100 million minutes per day were lost to flight delays. While several factors influence delays, airport infrastructure continues to grapple with capacity needs to serve the growing passenger base. According to the Airports Council International–North America (ACI- NA), all categories of airports will require investments in terminal buildings, access to terminals, airfield capacity, and airfield reconstruction over the next few years. The largest portion of the investment need at large, medium, and small airports is for terminal buildings and ranges from 30% to nearly 50% of total needs.

Last year, a consortium 49% owned by Ferrovial won a bid to build, finance, operate and maintain the New Terminal One at John F. Kennedy International Airport in New York. The facility replaces three old terminals with a structure three times the size, four times the retail space and capable of serving 23 million passengers daily by the time it is complete in 2028. The $19 billion redevelopment project also includes preparing for more extreme weather events by relocating sensitive electrical equipment to rooftops to protect it from flooding, reinforcing runways to handle extreme temperature swings and revving up air conditioning as climate change complicates operations.

Very few companies have the unique set of financing, development and operational capabilities to execute these highly complex projects. Once constructed, these transportation assets become a means to alleviate congestion, boost throughput and spur economic growth while also allowing Ferrovial’s shareholders to earn a return commensurate with risks associated with the project.

Change is Constant and Inevitable

The world will continue to change in dramatic ways that are difficult to imagine. Continued rural to urban migration means that by 2050, 6.7 billion people will reside in megacities, up from 4.6 billion today. About 52% of the world’s population will reside in regions prone to water stress. One in six people will be over the age of 65. Three billion more cars will be on the road. Approximately 10 billion passengers (2019: 4.5 billion) will be carried by air some 22 trillion kilometres (2019: 8.9 billion) each year³. It is often stated that 75% of the infrastructure in place by 2050 does not exist today. That infrastructure will be tasked with serving a growing urban population with greater mobility and connectivity needs.

The human brain is not wired to conceptualize broad, far-reaching and radical change. In advanced economies, we are in the midst of a renaissance of investment in physical infrastructure. It is often said that we tend to overestimate the change that will occur in the short-term and underestimate the change that will occur in the long-term. The most probable originator of this dichotomy is Roy Amara, a Stanford computer scientist, who mentioned it in the context of technological innovation. Developers of long duration assets, including physical “built” infrastructure, also need to overcome their inherent limitations to envision the future world even though it may not yet be very apparent. The capital deployed over the next few years presents a generational opportunity for investors to earn strong risk-adjusted returns and participate in building the foundation upon which the economy will grow over the next several decades.

The Starlight Global Infrastructure Fund is a concentrated portfolio of companies that provides essential and foundational services in a supply-constrained manner for the basic functioning of society. The culmination of our bottom-up investment process is a selection of resilient business models managed by skilled operators that have exposure to the broad secular trend of infrastructure renewal. The holdings in the Starlight Global Infrastructure Fund comprise companies that produce cash flows from the construction, operation, and maintenance of long-duration assets. The Starlight Global Infrastructure Fund yields over 5.50% annually and the distributions are paid to unitholders on a monthly basis. The distribution is supported by strong dividend growth from the underlying portfolio holdings. Over the last twelve months through the end of June 2023, the fund experienced 23 dividend increases with an average increase of +12.1%.

Inception—2018

Investment Objective:
To provide regular current income by investing globally in companies with either direct or indirect exposure to infrastructure.

Fund Profile:
Starlight Global Infrastructure Fund - Series ETF (SCGI)
Starlight Global Infrastructure Fund - Series A (SLC102)
Starlight Global Infrastructure Fund - Series T6 (SLC152)
Starlight Global Infrastructure Fund - Series F (SLC202)
Starlight Global Infrastructure Fund - Series FT6 (SLC252)
Starlight Global Infrastructure Fund - Series O (SLC402)
Starlight Global Infrastructure Fund - Series O6 (SLC452)
Starlight Global Infrastructure Fund - Series I (SLC902)

Distribution Frequency
Fixed Monthly