Agefi Indices - March 2023 - In terms of global assets under management, private investments in infrastructure exceeded USD 1,000 billion for the first time in 2021/22 and are expected to grow by 116% in the next five years.
This makes infrastructure the fastest growing asset class in the private and alternative markets. At the start of 2023, almost 350 infrastructure funds were being raised, with the aim of attracting over USD 250 billion.
This growth is mainly being driven by inflation concerns, geopolitical instability and efforts to increase energy independence, and by the huge investments needed to achieve transitions in the energy, environmental, digital and mobility fields. Privately funded infrastructure is also a way of making up for insufficient government and corporate budgets in this area.
Investors’ growing appetite for infrastructure as an asset class also stems from its resilience to market cycles, its low correlation with other asset classes and its status as an inflation hedge. The main feature of infrastructure assets – as well as high entry barriers in many cases – is that they generate predictable cash flows over the long term, which translate into stable and attractive returns, while also helping to reduce volatility in an investor’s portfolio.
Since building and operating infrastructure accounts for 79% of global carbon emissions, investment in sustainable infrastructure is urgently needed in order to hit global carbon-reduction targets. Participants in the financial markets have a major role to play in this transition, by focusing investment on new-generation infrastructure that is greener, more sustainable, more connected and more socially responsible, and which forms the backbone of a more efficient economy.
And there are many attractive opportunities for investing in infrastructure that will support each type of transition:
Energy transition
Population growth and urbanisation, along with growth in the global economy – which is expected to double in size between now and 2045 – mean that energy demand could grow by around 30% during the same period(1). The threats posed by global warming also require urgent action. Some 140 countries responsible for 90% of the world’s greenhouse gas emissions(2) have adopted or plan to adopt carbon-neutral targets, and so must decarbonise their economies.
By 2050, almost 90% of electricity will have to come from clean sources(3), and this will require up to USD 30,000 billion of investment in clean energy infrastructure between now and 2040. This trend towards clean energy has accelerated sharply now that the conflict in Ukraine has forced Europe to seek greater energy independence. Governments are supporting these transitions through taxonomies(4) and regulations(5). The IRA (Inflation Reduction Act) in the United States and Europe’s REPowerEU plan are aimed at boosting transition-related spending.
Solar and wind power should account for 70% of the energy mix by 2050. However, transition investments are not limited to new renewable energy generation capacity. There are also many opportunities to invest in power storage and transmission, as well as in grid improvement and stabilisation.
Energy efficiency is also a key driver of the transition, and will account for more than 40% of the reduction in emissions required between now and 2040.
Demand for green hydrogen is expected to increase sevenfold by 2050.
Finally, massive investment is needed to reduce the carbon footprint of industry, particularly in the construction sector and the heavy consumption of urban heating and cooling systems.
Environmental transition
Environmental, water and waste services are also in the spotlight. Recycling is still seriously underdeveloped in certain European economies, with only 15% of plastic recycled each year according to McKinsey. However, recycling is a crucial part of a circular economy. Investment in turning waste into energy is also needed. Drinking water distribution and wastewater treatment infrastructure must also be improved, while new technologies will enable users to control and reduce their water consumption.
Digitalisation
The pandemic has accelerated the digitalisation of the economy but has also highlighted inequalities in terms of access and connectivity, which has proven essential for maintaining social cohesion.
Data transmission, storage and processing needs have considerably increased with the rise of working from home, the internet of things, artificial intelligence, the cloud and smart cities. This is resulting in greater demand for wireless connectivity, fibre-optic networks, 5G towers and antennas, and datacenters. This transition is being supported by government spending, new regulations and international co-operation. Brookfield estimates that over USD 1,000 billion of investment in data infrastructure is needed around the world over the next five years.
The proportion of European homes with fibre connections is expected to rise by 67% between now and 2026. However, installing fibre networks and addressing accessibility issues(6) will require a great deal of capital. The process of rolling out 5G – and then 6G – technology is underway, particularly in Europe, and this is also requiring significant investment.
Mobility
In 2021, the European Commission published its Sustainable and Smart Mobility Strategy, with the aim of reducing CO2 emissions arising from transport by 90% by 2050. The mobility sector is currently the largest emitter of greenhouse gases in the EU. The adoption of electric vehicles will play a key role in making the sector climate-neutral, and will be boosted by the EU’s recent decision to ban the sale of new cars running on fossil fuels by 2035. The International Energy Agency estimates that 300 million electric vehicles will be needed between now and 2030 to achieve net zero. Investment will be needed in charging points on roads, car parks and users’ homes. The EU’s targets will also require changes in public transport and urban mobility, with the focus on electric trams, buses and underground trains, along with efforts to reduce carbon emissions from air travel and freight.
To sum up, the transitions required to build a more sustainable world are creating a number of attractive opportunities for infrastructure investments aimed at both adapting existing assets and building new ones. These next-generation infrastructure investments will be supported by government incentives, new regulations, private capital and initiatives taken by citizens themselves.
(1) Infrastructure 2022 Market Outlook. Carlyle, December 2021
(2) The Climate Action Tracker (CAT): climateactiontracker.org/global/cat-net-zero-target-evaluations
(3) Bouckaert, Stéphanie, et al. Net Zero by 2050 – A Roadmap for the Global Energy Sector. IEA, May 2021
(4) The EU taxonomy defines six environmental objectives and regards an economic activity as sustainable if it contributes to at least one of those objectives.
(5) Non-Financial Reporting Directive (NFDR) and Sustainable Finance Disclosure Regulation (SFDR)
(6) FTTH Forecast for Europe – Market forecasts 2021-2026. IEA, September 2021
Charlotte Dewynter
Head of Infrastructure
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