Why merchant risk is not a flaw, but must be designed
The basic assumption of stability
Infrastructure is considered stable, plannable, contractually secured. Cash flows are contracted.
And yet part of the risk can be overlooked or at least underestimated: merchant risk. In some cases, this may be due to the fact that it sometimes wants to present itself more advantageously in the structure than it actually is economically.
1. Merchant is often there – even if he doesn’t look like it
The distinction is quickly formulated:
- Contracted: Cash flows are contractually fixed, largely independent of market prices
- Merchant: Revenues arise from prices, volumes and market mechanisms
This is clear in theory, but fuzzy in practice. This is because assets can move between these poles – and the fund structure often exacerbates this fuzziness.
Examples:
- Renewable energies with only partial protection
- Storage solutions whose revenues come from short-term markets and which are directly linked to the operator risk
- Digital infrastructure, even the utilization of which cannot be fully guaranteed
The key point is that the contract stabilises cash flow. He does not produce it.
2. Clean diagnosis
This makes the actual task clear:
- Does the asset class structurally have merchant risk?
- Is it reduced by the structure – or is it just packaged differently?
- And: Is it adequately taken into account in pricing?
After all, a seemingly stable payout profile is not necessarily an expression of low volatility if it is simply a shift in volatility. Or in other words: Sometimes you don’t just buy stability, but the bag to go with it.
3. Design: Make merchant risk investable
Once merchant risk has been identified, the question arises not only of avoidance, but also of design. Especially with newer types of infrastructure, this is where the lever lies.
Structures can be built in such a way that market volatility does not disappear –
but is transformed into a form that becomes sustainable.
For example, by:
- Risk shift to specialized operators who operate closer to the market
- Contractual elements that smooth out cash flows without changing their source
- Selective hedging that limits tail risks but preserves upside
The result is not a “contracted” investment in the narrower sense, but a deliberately designed relationship between market and contract.
A generally underestimated lever here lies in the time structure of the cash flows:
If returns occur early and more volatile earnings components are incurred later, the risk profile shifts significantly in favor of investors. The risk does not disappear then, but it is distributed differently.
📌 Result:
- Merchant risk is not a contradiction to infrastructure, but often part of the business model.
- The quality of an investment is therefore not primarily determined by whether merchant risk exists, but whether it is recognized,
priced and structured.
