3D View: The 3 Megatrends Shaping Infrastructure - Decarbonization, Deglobalization, and Digitization

Infrastructure Summits bring industry experts together – both GPs and LPs – to present industry data and discuss the latest asset class developments. As such, they give delegates a great opportunity to delve deep into the details and ensure the right questions get addressed. Over the last two years, an array of leading organizations have taken the stage, including:

● Arclight Capital Partners
● Aon
● AXA IM Prime
● Eiffel Investment Group
● Vauban Infrastructure Partners

One of the key takeaways from the last two summits is that the ‘3D’ megatrends will open up the need for continued private investment over the coming decades. Funding gaps in the middle market, in particular, are likely to provide plenty of deals for investors to pursue, and drive operational improvement.

With inflation rising alongside interest rates, infrastructure has continued to expand in recent years. European core infrastructure investment has grown from approximately EUR26 billion in 2009 to EUR150 billion today. There is an optimistic feeling among institutional allocators on how infrastructure allocations will progress over the next few years given how resilient the asset class has proven to be across economic cycles. Not to mention its strong de-correlation to equities, and its ability to offer an effective long-term hedge against inflation.

This has supported strong fundraising (though 2023 was an exception), with overall dry powder growing from $275 billion in 2020 to $339 billion through January 2024.

Energy Transition

The move to a decarbonized world is well in train as countries prepare to meet carbon neutrality goals laid out in the Paris Climate Accords by 2050. This will require somewhere in the region of EUR70 trillion of investment. Energy transition is at the spearhead of this paradigm shift, with EV charging, Hydrogen, battery storage, and biomass renewables providing a wide canvass of deal opportunities. Energy consumption also offers a lot of value in areas such as district heating networks, smart metering, and waste management.

On the co-investment side, investors are looking for deals in smart meters and EV charging networks. Traditional gas networks that are transitioning to a greener model are another interesting area.

This is not to say that the risks are insignificant. During IPEM Paris 2023, it was noted that stranded asset risk is as much of a consideration in energy transition as it is in the oil and gas industry. As the pace of innovation continues, and new technologies emerge, areas like battery storage and EV networks could become outdated.

Digitalization ~ High-speed deal flow

The digitization trend is hard to ignore. The move towards 5G networks, the explosive impact of Gen AI in the software technology industry, and the need for greater computing power, are accelerating the development of digital/data infrastructure in Europe: from cell towers to the latest high-tech data centers. This is presenting investment opportunities in value-added and core infrastructure, with investors expecting further consolidation in fiber optics and tower expansion.

Here are the current top 10 data center projects in Europe.

Repricing in response to higher interest rates over the last two years has inevitably led to a pricing gap between buyers and sellers. In digital infrastructure, tower transactions have repriced considerably over the last 12 months, while fiber networks in resilient countries like France and Spain have experienced some repricing, compared to countries like the UK.

Within the energy transition, this has led some to ponder whether the sub-sector has become a bit of a bubble, in terms of risk/return. The scarcity of assets is one factor contributing to higher pricing, with some investors expecting this to continue. Other factors such as the macro environment, increase in Capex costs and inflation pass-through must also be considered.

The key is to understand the strength of the sector and the underlying asset – why is the price going up? What are the macroeconomic factors? Patience is a virtue in that respect.

Here’s a short clip featuring Christophe Bruguier, senior investment director at Vauban Infrastructure Partners, discussing energy transition and the need to avoid the risks of holding stranded assets during the morning session at IPEM Paris: 

The race to renewables, and the fallout of the Ukraine invasion in 2022 – which highlighted the vulnerability of national energy security – have prompted countries to focus their attention on domestic resilience. In part, energy dependence is driving the deglobalization trend. Energy transition and storage are expected to be notable areas of interest in 2024 as investors look at the M&A landscape. Supply chains and how they are managed will be critical. Any risk of cost overrun can have an adverse impact of infrastructure asset valuations.

A clear example of deglobalization is the US onshoring of semiconductor production. When Congress passed the CHIPS Act in 2022, it ushered in an opportunity for infrastructure investors to build out the country’s semiconductor manufacturing capabilities. Brookfield Infrastructure Partners signed a deal with Intel to jointly fund its semiconductor fabrication facility in Chandler, Arizona.

The three megatrends of decarbonization, deglobalization, and digitization are likely to experience long-term tailwinds, presenting plenty of opportunities for further growth in infrastructure, as the asset class meets the demands of a shifting world.

As was suggested during the infrastructure summit at IPEM Cannes 2024, this is an optimal time to invest in infrastructure:

1. It is hyper-resilient and defensive in nature;
2. It has a low correlation to other alternative asset classes;
3. It is a catalyst for sustainability, with the need to modernize infrastructure systems.

Plenty of uncertainties remain in the marketplace, however, so it is important for investors to remain disciplined. There is still a lot to consider when assessing the deal landscape. This is a great time to be thinking about infrastructure as a portfolio diversifier. So don’t miss out on shaping the debate. Start thinking about the questions you want answered.

For those who were unable to attend either event, there’s no need to worry! The good news is that we will be continuing to forge ahead and debate these important developments shaping core and value-added infrastructure at our upcoming IPEM Events.