Infrastructure’s ability to provide long-term stable returns, yield and inflation protection and act as a diversifier within portfolios, as well as predicted growth rates, should make it a research focus for paraplanners, argues Roger Pim, senior investment director, infrastructure, abrdn.
Infrastructure investment has the potential to impact all our lives as it relates to the investment in critical assets and facilities necessary for the efficient running of society such as transportation systems, utilities, energy and communications networks. This kind of long-term investing can help to drive structural change including the need to decarbonise parts of the economy.
The outlook for infrastructure investing this year remains positive as it continues to evolve from what used to be niche allocation to being considered as an important asset class in many institutional investors’ portfolios. This is in large part due to the asset class’s ability to provide investors long term stable returns, yield and inflation protection frequently underpinned by long-term contracts, thus acting as a diversifier within portfolios balancing more volatile liquid markets.
Last year saw a material slowdown in infrastructure fundraising in large part due to “the denominator effect” whereby many investors found themselves at the top of their allocations due to the declines in the valuations of other asset classes, such as real estate and equities. 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.
The ongoing need for renewable and conventional energy investment will underpin growth. Europe is expected to lead the way as it seeks out long-term energy security, if not independence. Indeed, the diversity of the asset class means it’s affected by different market drivers and here we look at energy, transport, utilities and digital.
Energy
The energy sector is in the middle of an unprecedented low-carbon transition. Policymakers also need to balance security of supply with affordability. Emissions from electricity generation have steadily reduced since 1990, and progress is being made towards the binding target of achieving 40% of the energy mix from renewables by 2040.
While the 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 and we also see attractive opportunities in still developing areas, such as biogas and biomethane, energy storage and hydrogen.
Transport
The transport sector is the second-largest source of greenhouse gas emissions in Europe and they continue to rise. 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 decarbonisation and other challenges, including placemaking, local air quality and productivity (through efficient and affordable mobility). The focus on decarbonisation 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 such as shipping and port infrastructure.
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 the producer and the consumer, operating in a quasi-regulated or regulated environment and ensuring security of supply.
Trends like decarbonisation, electrification, the protection of biodiversity and water resources, and the circular economy are key for the utilities sector. Utilities are well-placed to offer solutions to these challenges. There are particularly interesting investment opportunities in the small to mid-cap segment of the market, where there’s agility to react quickly to changes in customer demand.
Digital
Digital in this context covers broadcast and mobile towers, fibre networks, meters, data centres, and other technologies like 5G. These assets can present attractive investment opportunities, given long-term confidence in revenues and, in some cases, subsidy backing, which is available for fibre network roll-out 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 those living in rural locations. High-speed fibre broadband can also enable productive 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 the fibre, towers and data centre segments.
We’re excited about the strong pipeline of new investment opportunities and expect to see continued strong growth of the infrastructure asset class over the coming years. The overarching requirement to decarbonise the energy sector, transportation and utilities across Europe not only creates the need for significant capital investment, but creates attractive sustainable long-term investment opportunities for investors.
