Can You Beat the Market Investing in Infrastructure Financing Companies?

Let's get one thing clear. Private infrastructure has been around for a long, long time. This is not some sort of new idea that somebody just draft up recently. This has been going on since forever. In fact, a good argument could be made that private infrastructure preceded government infrastructure.

The question post by the title of this blog post is very interesting because it turns on one crucial component. It turns on interest rates.

Now, this should not be a surprise. Anytime you come across some sort of financing company, the first thing that you should think about involves should be the rate of interests because that's the really the bread and butter of finance companies. Nobody can beat them at the finance game. It is their world.

It doesn't matter what kind of projects they normally fund. It doesn't really matter what kind of management they have. Even well-run finance companies that are basically taking the financing industry by storm are all too vulnerable to the ups and downs of interest rates. There is such a thing as a breaking point and we're quite lucky that we live in an era of low interest rates.

The sad reality is that this is actually a statistical fluke.

If you look at the history of finance in the United states, interest rates were actually quite high for a long time. What if I told you that as recently as 30 years ago, it's not unusual to pay more than 10% annual interest rate.

You might be thinking I'm crazy, but that's absolutely true. In fact, in certain parts of America's economic history, the adjusted interest rate is higher than 15%.

Our current blessing of low interest rates is a recent phenomena. I wish I could tell you that it's going to be go on indefinitely but nobody can make that claim. Nobody is so bold as to claim that. That's just being foolhardy.

The truth is it's anybody's guess how long we will continue to operate in this type of environment. This is why you have to be very careful when it comes to investing in infrastructure financing companies.

They are very susceptible to movements of interest rates.

When interest rates go down, these companies are great deals. In fact, they are steels. They really are.

If you invest in such a company, the ROI goes up because they charge fairly decent interest rates as a kind of a last resort. Infrastructure players that borrow from them pay top dollar. Now, this seems all well and good, but the problem is, if these are fixed rates, when interest rates go up, the rates that they are changing actually will be lower than the market average.

This creates all sorts of problems. They're no longer competitive. Pay close attention to interest rates if you are thinking of investing in an infrastructure financing company.

I'm not saying that you should not do it. I'm not saying that this segment of the equities market is somehow off limits to you.

But you need to wrap your mind on interest rate, interest rate projections and overall interest climate to make a better call, otherwise, it's going to be rough going because the industry is really sensitive to interest rate movements.

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