Asset Class Infrastructure Equity

Summary

Investments in infrastructure equity are attractive to investors for various reasons. On the one hand, the need for investment worldwide is enormous. According to a study by McKinsey, almost three trillion Euros will have to be spent on infrastructure worldwide every year until 2030 to keep pace with expected economic growth. Furthermore, infrastructure investments offer attractive risk-adjusted and inflation-protected returns with stable, ongoing income from long-lived tangible assets. Finally, they have a low correlation to other asset classes (equities, bonds, real estate, etc.) and the economic cycle and comparatively low cash flow volatility. Predictability and diversification effects are therefore strong arguments in favor of infrastructure as an asset class for investors. Especially in a low-interest rate environment, infrastructure investments offer an attractive alternative to government bonds, for example. 

​Investing in private infrastructure offers a compelling long-term value proposition. ​Compared to public markets, accurately timing investments may result in limited upside potential, while the consequences of mistiming can also be mitigated.

Due to their characteristics, infrastructure equity investments are ideal for pension funds and insurance companies.

Infrastructure Investment Topics

Deglobalization:
Deglobalization is no longer viewed negatively in the business community. The shift towards onshoring manufacturing capacity and prioritizing energy security necessitates significant investments. Interestingly, this trend is also leading to the development of new facilities in rural areas that were previously overlooked. As a result, infrastructure investors now have access to untapped markets. Embracing deglobalization can bring about new opportunities for growth and development. 

Source: World Trade Organization, October 2023.

Digitalization:
The COVID-19 pandemic has underscored the significance of digital infrastructure, particularly with the increased adoption of remote work and education. The popularity of high-definition video conferencing has made high-speed internet a necessity. However, deal volumes for digital infrastructure investments have declined since reaching a peak of almost USD 200 billion in 2022. Investors have become cautious due to overly optimistic growth assumptions and debt-fueled investments. Nonetheless, the hype surrounding ChatGPT and generative AI has brought renewed energy to the sector, as evidenced by the increased stock prices of data center companies like Digital Realty and Equinix. Given past disappointments of similar trends, investors need to approach this opportunity with a balanced perspective. Nevertheless, supported by reputable hyperscale companies, AI may drive significant investment in AI-related infrastructure. 

Source: UBS

Decarbonization:
Clean energy remains a popular investment choice for infrastructure funds, driven by technological advancements, political backing, and stable economics. While some negative headlines have been regarding pushback against green energy, most renewable investors and developers remain confident in the industry's future. However, skeptics are raising concerns about potential risks from this opposition. With essential elections approaching in the US and Europe, policy changes could possibly impact the renewable energy sector. Despite these uncertainties, the International Energy Agency forecasts significant global green energy investments of USD 1.7 trillion in 2024 and beyond, demonstrating continued growth and potential opportunities. 

Source: UBS

​Why investors should consider smaller infrastructure funds with a mid-market focus rather than larger funds

Risk profiles are complex, especially for larger projects with multiple potential points of failure. The mid-size infrastructure market tends to be underserved and, therefore, allows for attractive returns with well-mitigated downside risk. Larger funds with over 1.5bn euros face challenges in deploying their capital. Limited availability of deals compared to global capital deployment puts pressure on these entities to invest within their investment horizon. This may result in increased prices and higher risk tolerance. Significant funds may adopt different strategies in the competitive landscape of larger infrastructure transactions. However, smaller funds in the mid-market benefit from deal scarcity and abundant capital, allowing them to invest flexibly and reject unfavorable transactions.

We like managers that tailor the risk profile to align with their goals rather than relying solely on due diligence. In addition, where these smaller funds have a powerful proprietary deal sourcing network, it brings the advantage of working on transactions before they hit the market, giving them a head start and less competition on price.

Well-established funds have the expertise to develop projects from construction to operations, creating a value inflection point. When investing in such "smaller funds", there is potential for lower risk and better returns due to the time and effort put into developing the opportunity and structuring the deal. This involves creating contracts and collaborating with stakeholders. 

​The manager's active involvement and experience greatly benefit the contract terms with developers. Their hands-on approach and ability to develop trusted partnerships add value to the developers/vendors, leading to better opportunities for growth.

Conclusions

​Smaller funds with a mid-market focus offer a practical investment strategy. These funds focus on mid-market companies with strong growth potential and less competition than larger companies. By investing in these funds, investors can benefit from the upside of mid-market companies while mitigating risks associated with larger, established companies.

RML Advisory currently offers qualified investors access to two exciting infrastructure equity investment opportunities.

For more information, please reach out to us.