And what about INFRASTRUCTURE?

Dr Georg Inderst is an independent adviser to pension funds, institutional investors and international organisations. He is one of the prime international experts on infrastructure investment and finance for developed and emerging countries. His work is based on extensive experience in investment management, economic research and pensions governance. Here, Georg covers the major milestones in infrastructure since 1984, how the asset class has changed in this time and future trends…

Infrastructure investing has seen a remarkable development. Traditionally, it was about a sectoral allocation within the listed equity and bond markets. Following the wave of privatisations in the 1980 and 1990s, power, water and telecom utilities became popular with institutional investors. They were typically viewed as ‘boring’ stocks but, equally, they produced steady high incomes.

The new, dedicated asset class of unlisted/private infrastructure was invented in the 1990s in Australia, spreading to Canada and Europe from the early 2000s, followed by the USA, Asia and other regions. The volume of such investments has kept growing to over USD 1 trillion globally.

Despite its ‘youth’, infrastructure investing has gone through some pronounced transformations. Initially, the main sectors targeted were in large-scale, capital-intensive economic infrastructure: transport (such as airports, ports, motorways, tunnels, bridges, railways, metros), electricity, gas, water and communications networks. Over the last decade, the emphasis has shifted to renewable energy, rising to roughly half of all transactions. Consequently, many investors’ portfolios have become greener, but also rather concentrated on wind and solar.

Another significant shift, accelerated since COVID-19, is to digital infrastructure such as fibre cables, satellite towers and data centres. With the pandemic, attention also rose for social infrastructure (health and care, educational and cultural facilities, social and affordable housing, etc.). However, the actual investment activity has remained small and mostly concentrated in Europe. To sum up: the definition of infrastructure is changing, expanding from the ‘hard’ to the ‘soft’, from ‘physical’ to ‘virtual’ networks that provide essential services to society.

Going forward, the well-known megatrends such as urbanisation and digitalisation will continue to shape infrastructure investing. The latter carries great opportunities but also enormous challenges, in particular the escalating risk of cybercrime.

Decarbonisation is moving higher on the agenda of investors. Managers will have to go further than the mainstream renewables. Energy transition assets are in demand, whether they be in transmission and distribution, batteries and grid stabilisation, carbon capture and storage, hydrogen, EV stations or others. There is also not enough focus yet on energy efficiency and security, or on upgrading existing transport networks to become more climate-resilient. Way too little money has gone into climate adaptation schemes so far.

All this requires wise government leadership to set the right framework to attract private capital. This leads us to another point: politics as a major challenge. Investors note that infrastructure is inherently political, whether they are regulated utilities, public-private partnerships, or contracted with local authorities. Sudden changes in laws and regulations can easily upset all spreadsheet calculations.

To go one step further, consider the rise of ‘infrastructure nationalism’. Somewhat unnoticed, over the last decade, more and more countries have started to protect critical or strategic industries from other nations because of national security concerns. This affects not only defence but also transport, power, communications, resources, high-tech, artificial intelligence, research and other areas. Such barriers lead to delays, uncertainty and higher costs. Not surprisingly, some investors have started to hire local political analysts.

Last but not least, infrastructure investments have a high economic, social and environmental impact. On the positive side, there is a natural connotation with green objectives (e.g. public transport, clean water) or social issues (e.g. health, education). However, let us not forget the other side – infrastructure companies can be prone to wasteful decisions, complex financial engineering, nature destruction, and even corruption.

For asset owners, being involved in bad infrastructure developments carries high reputational and legal risks. Credibility with customers and the wider population is crucial. Talking sustainability is not sufficient. People will insist on visible service improvements - even more so from private-sector owners and operators of public infrastructure.

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