Around the world, there are signs that infrastructure is struggling to cope with continued economic and population growth. Blackouts, traffic congestion and over-capacity on railways and at airports are commonplace not only in the developing world, but in Europe and the US. As people become wealthier they are demanding better facilities, prompting governments to build new roads, bridges, hospitals, airports and water projects.

Increasingly, governments are turning to the private sector to fill the funding gap. Consequently, banks and money managers are creating funds to raise the money required and investors, looking for alternative assets, are piling into them.

Before 2007, the estimated size of the infrastructure fund market was $42bn (£21bn, €27bn). Today, the sector is worth almost three times that amount at $120bn. Some 70 new funds opened in 2007 alone. Morgan Stanley recently closed a $4bn infrastructure fund and a Credit Suisse-backed fund closed at $5.6bn

The funds are attracting record assets after returning up to 20 per cent a year on low risk investments - typically in stable assets such as toll roads and power generation plants, which are often guaranteed by governments. Investors in such low risk assets would normally expect a return of 2-4 per cent above the risk free rate. So how have infrastructure funds produced such superior returns?

Infrastructure funds have typically been assigned to the real assets class, which includes real estate and commodity producing assets such as mines and oilfields. Yet, the returns that many infrastructure funds produce are not, in fact, pure real asset returns.

Returns have instead emanated from releveraging the finances in a previously "cheap" debt market. The stable cash flow that can be gained from infrastructure makes it easy to gear up with large amounts of debt, and in the era of cheap finance, banks were more than willing to provide the leverage.

Meanwhile, with a flow of money into the asset class, many managers have put funds into assets based on ambitious revenue forecasts, or tight financing assumptions. A common strategy has been to invest in an asset using a high internal risk rating. Then, as the asset matured, money managers have increased the internal valuation by reducing the risk rating and refinanced the asset to release cash for redistribution to investors. As a result, funds have managed to distribute more cash than the underlying assets have produced through operations.

There are close parallels here with the residential property market. Infrastructure funds are simply doing what many mortgage borrowers were doing up until last year. In a world of cheap mortgages, low deposit requirements and rapidly rising house prices, it made sense to lever-up.

For both the housing and infrastructure sectors, the removal of easy financing stops this seemingly virtuous cycle dead in its tracks. If infrastructure funds cannot rely on refinancing to produce returns, the model starts to look less robust. As with any leveraged asset, any downturn in capital values or difficulty servicing the debt with cash flows is suddenly a serious issue.

Recent events in the infrastructure world suggest the credit crunch is already biting. In May, a Macquarie-led group pulled out of the auction for the Pennsylvania Turnpike, the largest privatisation of a US road, citing price concerns. Citigroup and Abertis Infraestructuras SA, a Spanish toll road operator, won the auction after making a record $12.8bn bid. For investors, infrastructure is still an attractive asset class. Infrastructure funds provide predictable income and are a useful source of diversification, combining protection against unexpected inflation with a low correlation to equity markets and the economy.

But the era of excessive returns is over and many infrastructure funds are managing an overhang of commitments made in the pre-crunch environment.

The task for investors is to find funds that will provide diversified returns, without falling into potential pitfalls. With so much money sitting with infrastructure funds, the pressure to use the cash is high. Despite the new atmosphere of caution in the sector, there must be a danger that funds will still end up bidding for assets based on ambitious revenue forecasts, or tight financing assumptions. Investors will hope that funds resist this and that infrastructure can return to being a dull, but low-risk asset class.

Charlotte Thorne is a partner at Capital Generation Partners