Over the past decade, assets under management in infrastructure funds have nearly quintupled to $1.3 trillion. Pension funds and sovereign wealth managers have been lured by the sector’s returns, which are handsome and relatively stable. Some of the biggest funds now invest directly in these boring assets.
The infrastructure-investment sector
The infrastructure-investment industry took shape in the 1990s and 2000s. Western governments began looking for private investors to acquire—and help revitalize—aging infrastructure: from airports and railroads to water utilities. Later, companies ranging from energy suppliers to telcos turned to infrastructure investment firms to offload assets such as pipelines and cell towers.
The three big trends
Today, demand for infrastructure investment has soared, thanks to three major trends:
1. The first has to do with getting rid of carbon
For the world to meet its climate change goals, about $8 trillion will need to be invested in renewable energy sources such as solar and wind, in batteries to store them and transmission lines to transport them. Huge investments in hydrogen facilities will also be needed to produce carbon-free fuel for planes and ships.
2. The second big trend is digitization
The digital world tends to overtake the real world, but without fiber optic cables, 5G networks and data centers it cannot function.
3. A third very important trend is deglobalization
Efforts to shift supply chains away from China are boosting demand for factories. Hence the thirst for capital is great. In Europe, energy security concerns following Russia’s invasion of Ukraine has accelerated the construction of LNG terminals aimed at importing fuel from non-conflict areas.
All this demand for investment comes at a time when government and corporate balance sheets are under pressure. More specifically:
- The US federal government debt, which exceeds $34 trillion, will continue to grow over the next decade.
- Many governments in Europe are also heavily in debt.
- Higher interest rates make these obligations more expensive to service.
- They also make life difficult for companies.
- The need to deleverage will limit their ability to make large investments in the coming years.
- Infrastructure investors are ready and willing to fill the gap.
- In 2022 Intel, a major semiconductor manufacturer, turned to Brookfield to finance 49% of the construction of a new $30 billion plant in the US.
So far most infrastructure investors have focused on rich countries, where governments are more reliable and currencies more stable.
- More than four-fifths of the sector’s assets under management are allocated to Western markets.
- At the same time, the need for infrastructure is most acute in the global South, where both populations and economies are growing fastest.
- Investing in emerging markets is a great opportunity.
- The industry, then, looks set to become increasingly important to the global economy.
