In addition, infrastructure can also be viewed as a natural focus for sustainability efforts as it involves long-term investments that help to drive structural change, such as the need to decarbonize critical parts of the economy.
… Infrastructure continues to evolve from being a niche asset class only a decade ago to being viewed today as a key component of an investor’s portfolio.
We believe the 12-month outlook looks positive as infrastructure continues to evolve from being a niche asset class only a decade ago to being viewed today as a key component of an investor's portfolio. This is, in large part, due to its ability to deliver stable long-term returns, investment yield, and inflation protection often underpinned by long-term contracts. These benefits can help diversify portfolios, balancing out more volatile and liquid asset classes.
Asset allocation
Infrastructure fundraising suffered a slowdown this year.1 This was due to the so-called denominator effect in which infrastructure investments in portfolios reached asset-allocation limits relative to other investments, as the value of other asset classes fell amid rising uncertainty. However, this trend is expected to reverse over the next 12 to 24 months as other asset classes recover. In fact, according to Preqin, infrastructure is expected to be the second-fastest growing form of private-capital assets under management, with an expected compound annual growth rate of 13.3% until 2027.1
The ongoing need for renewable and conventional energy investment will underpin investment. Europe will lead the way as it seeks out long-term energy security, if not independence, amid concerns over Russian aggression. Infrastructure is an asset class with great diversity and each subsector is affected by different market drivers. Here's a quick summary:
Energy
The energy sector is in the middle of an unprecedented low-carbon transition and policymakers also need to balance security of supply with affordability. But emissions from electricity generation have steadily reduced since 1990, and progress is being made towards achieving the goal of 42.5% of energy requirements from renewables by 2030.2,3
While the energy transition is not without its challenges for infrastructure investors – not least because of competition, technological uncertainty, and delays – we expect momentum to accelerate further. This is supported by policy incentives, advancing technology, and shifting consumer demand.
Traditional renewables sectors such as hydro, solar, and wind are well developed and increasingly competitive. However, we also see attractive opportunities in still developing areas, such as biogas and biomethane, energy storage, and hydrogen.
Transportation
The transport sector is the second-largest source of greenhouse-gas emissions in Europe. Since 1990, the sector's emissions have risen by 33%, even as overall emissions fell 32%4 That said, there is a strong policy response emerging which includes regulations on electric vehicles, renewable fuels, and the inclusion of transport sub-sectors in emissions-trading schemes.
Public transport plays a vital role in addressing decarbonization and other challenges, including placemaking, local air quality, and productivity (through efficient and affordable mobility). The focus on decarbonization and mobility will continue to create new investment opportunities to replace older, less environmentally friendly forms of transport.
Alongside opportunities to fund the electrification of rail, bus fleets, and vehicle-charging networks, we see potential for attractive opportunities in other sectors. These include shipping, port infrastructure, and specialist areas, such as the electrification of ground service equipment at airports.
Utilities
The utilities sector provides a wide range of essential services, including energy transmission and distribution, water management, and district heating. Utilities companies will often manage and maintain the infrastructure between producer and consumer, operating in a quasi-regulated or regulated environment and ensuring security of supply.
Trends like decarbonization, electrification, the protection of biodiversity and water resources, and the circular economy are vital for the sector. Utilities are well placed to offer solutions. We prefer the small- to mid-sized segment of the market, where assets are best able to react quickly to changes in customer demand. Furthermore, we see a strong pipeline of investment opportunities in district heating, regulated energy utilities, and waste management.
Digital
The digital segment covers broadcast and mobile towers, fiber networks, meters, data centers, and other technologies, such as fifth-generation networks, otherwise known as 5G. These assets can offer attractive infrastructure-investment characteristics, given long-term confidence in revenues and, in some cases, subsidy-backing (which is available for fiber network rollout in some countries).
From a sustainability perspective, digital assets are a key driver of productivity in economies. They can contribute to improved connectivity and digital inclusion, particularly for people living in rural locations. High-speed fiber broadband can also enable home and remote working in these areas, which reduces the need for commuting.
While some digital sub-sectors are subject to challenges at present, we continue to see a strong pipeline of opportunities in fiber, towers, and data centers.
Final thoughts
We're excited about the strong pipeline of new investment opportunities next year and expect to see continued strength in the growth of infrastructure over the coming years. The overarching requirement to decarbonize the energy sector, transportation, and utilities around the world, not only creates the need for significant capital investment, but creates attractive sustainable long-term investment opportunities for investors.
1 Prequin, 2023.
2 "Greenhouse gas emission intensity of electricity generation." European Environment Agency, October 2023. https://www.eea.europa.eu/data-and-maps/daviz/co2-emission-intensity-14#tab-chart_7.
3 "Renewable energy targets." EU Commission, October 2023. https://energy.ec.europa.eu/topics/renewable-energy/renewable-energy-directive-targets-and-rules/renewable-energy-targets_en.
4 "Transport could burn up the EU's entire carbon budget." International Council on Clean Transportation, 2021. https://theicct.org/transport-could-burn-up-the-eus-entire-carbon-budget/.
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