Infrastructure: An asset class on the rise
The term “infrastructure” has always meant more than just roads and bridges (it also includes power plants, pipelines, and telecommunications networks), but infrastructure as an investment theme not infrequently used to seem rather boring. However, the market for (investments in) infrastructure has long since shed that dull image. The infrastructure sector, in fact, is benefiting these days from megatrends such as digitalization and decarbonization and is registering vibrant growth. More and more opportunities to partake in the return potential and defensive qualities of (private) infrastructure projects are presenting themselves today also for individual private investors.
Everybody wants in
Infrastructure is riding a tailwind, is taking off and/or is bristling with energy. Whatever image one employs – be it a wind turbine, an airport, or a power plant –, the actual message stays the same, i.e. the market for (investments in) infrastructure is registering rapid growth. The amount of fixed capital invested in private infrastructure projects has increased by a factor of 5x over the last ten years and by now totals more than USD 1 trillion, and more and more players want to get in on the action. There accordingly is a long list of takeovers that asset managers have made in recent years to strengthen their capacity in the infrastructure sector. European private markets giant CVC Capital Partners, for example, took over Netherlands-based infrastructure manager DIF Capital Partners (assets under management (AuM): EUR 16 billion) in September 2023. In February 2024, Swiss private bank Vontobel announced its acquisition of a majority stake in Ancala Partners (AuM: EUR 4 billion). But the biggest coup last year was scored by BlackRock. With its USD 12.5 billion acquisition of Global Infrastructure Partners (AuM: USD 100 billion), the world’s largest asset manager became one of the top three global infrastructure managers in one fell swoop and is now on an equal footing with its rivals Macquarie and Brookfield in terms of total infrastructure assets under management. Meanwhile, the infrastructure theme is increasingly in demand on the part of both institutional and individual private investors.
Litmus test passed | Infrastructure assets protect against inflation
Average inflation rate and performance in 2022
Sources: KKR, Bloomberg, Kaiser Partner Privatbank
Protection against inflation…
Investors’ increasing interest in infrastructure is no accident. There are good reasons for it. Infrastructure assets, along with gold and real estate, have always been regarded as a protector against inflation. During its roughly 25 years of existence thus far as an asset class, the infrastructure sector never had to furnish actual proof that this inflation-protection attribute was more than a mere presumption or perhaps just a marketing slogan, at least until the COVID-19 pandemic came along. That was the real litmus test of the purchasing power preservation qualities of infrastructure assets, which passed the test with flying colors. In the year 2022, when the global inflation wave reached its crest, (private) infrastructure assets – unlike stocks, bonds, and most other asset classes – not only registered a positive nominal performance, but also delivered a positive real return after subtracting inflation. This pleasing behavior of infrastructure assets from an investor’s perspective in times of elevated inflation was neither an anomaly nor a bug, but rather an inherent feature of this asset class because normally, the cash flows of infrastructure assets are contractually or regulatorily linked to inflation and accordingly increase when price indices rise. However, high inflation isn’t absolutely necessary in order for investments in infrastructure assets to perform well. Even in periods of below-average inflation and regardless of whether economic activity is strong or weak, in the past infrastructure has delivered a positive return in any combination of inflation (high/low) and economic growth (high/low).
A crisis-proof asset | Infrastructure outperforms during recessions
Average quarterly return one year before and during the financial crisis/COVID-19 recession
Sources: KKR, Bloomberg, Kaiser Partner Privatbank
…and defensive qualities
Where do the defensive qualities of infrastructure come from? “Infrastructure classics” like toll expressways, ship ports, and airports in particular are hard to replicate, and high barriers to market entry exist. Moreover, the cash flows of infrastructure assets (and the dividends they pay) often are secured not only by regulations and long-term contracts, but are also safeguarded by constant or very inelastic demand from end-users. A hydroelectric power plant, for instance, is a “classic” example here from the energy supply sector. “Old” infrastructure as well as infrastructure 2.0 (5G cell towers, data centers, fiber optic networks, wind and solar power) render essential services that are vital to our daily life. Last but not least, every type of infrastructure is ultimately underpinned by “hard” assets that have a long service life and an inherent value that normally tends to increase. All of those attributes make infrastructure an asset class that delivers good risk-adjusted returns and few surprises regardless of market cycles. (Private) infrastructure assets frequently even act as a parachute for an investment portfolio that opens precisely when you need it because they exhibit a relatively low performance correlation particularly to liquid assets like stocks and bonds. They provide effective diversification and stabilize a portfolio during turbulent market phases.
Good risk-reward tradeoff | Solid returns with low volatility
Returns and volatility (2004–2023)
Sources: KKR, Bloomberg, Kaiser Partner Privatbank
Private capital against the infrastructure gap
In the past, it was mainly the governments of this world that stepped up as investors in infrastructure, but private capital has become increasingly more important in recent decades. The trend that began in the 1990s with the privatization of state-owned infrastructure assets in Australia has since spread to the USA and Europa and finally also to emerging-market countries. This has happened not just because growing piles of debt are rapidly diminishing governments’ financial possibilities, but also because governments often lack the expertise needed to build and operate infrastructure projects that constantly are tending to become more and more complex. Moreover, government spending policies are increasingly being shaped by short election cycles in which a quick but non-durable repairing of timeworn infrastructure often seems politically more expedient than allocating funding for fundamentally new projects. Private (infrastructure) capital, in contrast, not only has deep pockets, but also has a long-term investment horizon. Over the last two-and-a-half decades, private infrastructure funds have proven that they operate infrastructure assets not just efficiently, but usually also better than public authorities do while at the same time being able to meet their investors’ return requirements. They thus by now have become an integral part of the infrastructure ecosystem in many countries around the world, and their role only looks set to grow bigger over the next two decades. According to calculations by the Global Infrastructure Hub, a G20 initiative, the world needed nearly USD 100 trillion in infrastructure investment between 2015 and 2024. If future spending isn’t ramped up more than heretofore earmarked, the gap between necessary and actually undertaken investment over the next 15 years looks destined to amount to USD 15 trillion. The current boom of the infrastructure theme and the increasing demand on the part of managers as well as investors thus have come at the right time.
The widening infrastructure gap… | …presents an opportunity for investors
Infrastructure investment need vs. current spending trend (in trillion US dollar)
Sources: Global Infrastructure Hub (G20 Initiative), Kaiser Partner Privatbank
Converging megatrends
Transportation infrastructure and traditional forms of energy production will continue to account for a large part of the trillions in annual investment needed in the years ahead, particularly in emerging-market countries. But the fastest-growing infrastructure areas today are digital (e.g. data centers and fiber-optic networks) or are related to the energy transition (e.g. renewable energy and battery storage). The worldwide volume of created, consumed, and stored data has exploded by a factor of 100x between 2010 and 2025 alone. Experts estimate that it will increase further by a factor of 4x over the next five years. It is not just artificial intelligence that needs and generates oodles of data and devours zettaflops of computing power – social media, cloud migration, and widespread content streaming also lead to a lot more data. Besides massive investments in data centers, a continued buildout of fiber-optic and cellular networks and further upgrades to the 5G standard will be necessary to accommodate the rapid growth of the innovation economy and the Internet of Things.
Exponential growth | Terabyte, Petabyte, Exabyte, Zettabyte…
Volume of data created, captured, copied, and consumed worldwide (in zettabytes)
Sources: Statista, Kaiser Partner Privatbank
With regard to the energy transition, the International Energy Agency (IEA) estimates that renewable energy sources will meet 80% of the world’s energy needs in the year 2050. Here, too, it is again artificial intelligence (AI) that is practically forcing the convergence of two megatrends – digitalization and decarbonization – before our very eyes as a result of its meteoric advancements. AI’s hunger for energy is immense. In the USA, for example, the electricity consumed by data centers looks set to increase by 150% during the short period from 2023 to 2027 alone, and two years from now it will already amount to around 380 TWh annually, accounting for approximately 8.5% of total US power consumption. It appears obvious to the largest users of data centers – the big US technology companies – that the enormous energy demand must be met by low-emission sources. Google and Microsoft have been the most ambitious voices in this debate thus far. They have set themselves the goal of operating completely CO2-free around the clock by the year 2030. Alongside wind and solar power, hyperscalers also see big future opportunities in the nuclear power sector to reach their ambitious targets. But the infrastructure story doesn’t end with energy production. In order to meet the growing demand for electricity in the USA, which looks set to increase by around 40% over the next ten years, substantial investment in the country’s 40-year-old (on average) power grid is absolutely imperative. It is estimated that the power grid’s capacity must double over the next 12 years to keep pace with the growing demand for electricity.
Artificial intelligence is ravenous | Data centers and energy supply present huge potential
Percentage of US electricity consumption accounted for by data centers
Sources: Ares, Kaiser Partner Privatbank
Private is preferable to exchange-listed
The investment case for infrastructure is plain to see. But what is the best way to invest? Exchange-listed vehicles mostly with daily liquidity – such as ETFs, mutual funds, or stocks in traditional infrastructure sectors – and the fast-growing but illiquid market for private infrastructure assets both court the favor of investors. The performance of the liquid segment did not disappoint in the past; it in fact delivered very solid returns. However, the correlation between exchange-listed infrastructure assets and equity markets was very high and their price performances were similarly volatile, especially when prices headed downward. Moreover, undynamic “old” infrastructure sectors heavily predominate in the exchange-listed segment. The preferable way to build up exposure to infrastructure assets, in our view, is to do that through private markets. Only private markets enable investors to directly partake in the huge growth potential of themes of the future like digitalization and decarbonization. Investments in private infrastructure assets have outperformed over the last 20 years by a wide margin and with much less volatility than the exchange-listed alternatives. In contrast to the liquid markets, they thus better reflect the stability of the underlying infrastructure assets. Adding private infrastructure to a mixed portfolio of stocks and bonds has noticeably improved the efficiency of investment portfolios in the past. In a macroeconomic environment shaped by a tendency toward higher and more volatile inflation and increased (geo)political and economic uncertainty, (private) investments in infrastructure assets are bound to continue to provide valuable diversification in the future. However, this portfolio parachute ultimately comes at a certain price. Investors must be aware that they have to forsake liquidity to earn the illiquidity premium associated with private markets. Although semi-liquid options make it no longer necessary to lock oneself into private-market investments for ten years or longer these days, investors in private infrastructure assets should nonetheless have an investment horizon of at least three to five years.
A successful mix | Infrastructure makes a portfolio more efficient
Returns vs. volatility (2004–2023)
Sources: KKR, Bloomberg, Kaiser Partner Privatbank