Core infrastructure: Investing in the age of renewal
The world is entering a phase of infrastructure renewal and investment. Aging or undeveloped core infrastructure will be replaced or refurbished, while technology change and data needs are already driving a wave of additional infrastructure investment.
In much of the developed world, fixed or “core” infrastructure — such as roads, bridges, water supplies, and power networks — is aging and due for renewal, while in emerging economies the infrastructure deficit is chronic and acute. This class of real asset has always attracted private investment — usually in partnership with governments — but today official finances are under pressure and private investment solutions are emerging to fill the gap as core infrastructure becomes a growing part of the investible world.
The size of the prize
Infrastructure represents a large share of the real asset investment space. The G20’s Global Infrastructure Outlook calculates that on current trends global core infrastructure investment (comprising energy, telecoms, transport, and water) will amount to at least a cumulative USD79 trillion by 2040, with an additional USD15 trillion investment gap of needs that would remain unmet if current trends persist.
This multi-trillion infrastructure investment opportunity is driving increasing private allocations to core infrastructure, with private investment now accounting for around 10% of all infrastructure investment according to the London Stock Exchange Group (LSEG). It is happening as part of a shift toward tangible assets with demonstrable impacts and because more investment exposure to core infrastructure is available, with better supporting data on the bankability of infrastructure projects.
“Infrastructure assets are phenomenal investments if you understand their nature, which is almost by definition a public good,” said Laurene Mahon, an independent infrastructure advisor and former senior expert with McKinsey. “That means you have to pay attention to what they cost and what they’re worth. Many of them are multi-generational assets, so how do you value an asset that’s going to last 100 years in a six-year infrastructure fund?” Mahon goes on to say that a good real asset investment in infrastructure is one that looks at timely management, risk, reward, and exit.
A growing bias to risk
The element of technology or regulatory risk in large infrastructure projects is something that private investors are embracing as real asset investment has evolved, said Laurence Monnier, an infrastructure advisor and Investment Committee Member at ImpactA Global, Temporis Capital and LBPAM.
“It used to be that you built an asset, maybe in a public-private partnership with a defined construction period, and then you had a contract with government or a private entity to manage the asset over a specified number of years, which gave you predictable revenue,” said Monnier. “That’s the traditional core infrastructure model. What we see now is an evolution toward more cooperative-type structures — so you may have infrastructure investment platforms with capital, but you may not know exactly what real assets will be acquired with that capital, or you don’t know what revenue contracts you will have in the future. It’s an evolution toward more market risk.”
While risk is present in every investment sphere, when it comes to large-scale infrastructure investors can take some comfort from the high level of anticipated demand for infrastructure-related services. Many large public infrastructure systems or networks are now aging and in need of extensive renewal, especially in developed economies. In Europe, for example, power networks are more than 50 years old on average, compared to around 20 years old in China. This means governments will have little choice but to find ways to encourage the financing of existing infrastructure renewal by refining their approaches to public-private partnerships (PPPs). The World Bank’s latest report on PPPs says that countries such as Australia, Chile, Brazil, and South Africa all offer current examples of successful PPP policies that have increased investment in areas like energy infrastructure.
The rise of InfraTech
“Three factors are changing core infrastructure investment,” said Monnier. “One is that government finances are stretched and direct support is lower. Another is that instead of a small group of relatively conservative investors, you now have a broader range of investors with different appetite for risk. And thirdly, the world we live in is evolving at an accelerated pace — technologies are changing and business models are changing.”
New technologies are also reshaping the way that private investors see core infrastructure opportunities. Technology used in construction and in management infrastructure assets — sometimes called “InfraTech” — includes innovations such as building information modeling, drones, remote sensing, and digital twin visualizations. Examples include the use of satellite monitoring to manage water use and water loss in the UK; the use of Blockchain-based data to manage critical infrastructure, such as ports (already in use in Antwerp, Rotterdam, and Singapore); or Internet of Things networks to manage water, waste, lighting, and traffic (already in use in Barcelona). They’re designed to integrate digital technologies with physical infrastructure to deliver efficient, connected, and resilient assets.
The G20 calculates that InfraTech could save around 22% of the investment cost of core infrastructure, making the next generation of large-scale investments markedly more attractive to private investors.
Meeting universal needs
Ultimately, core infrastructure investment is being shaped by the same trends that drive all real asset classes — a combination of fundamental societal needs and the emergence of new ways of doing things with technology. From an investment point of view, the fact that core infrastructure meets universal needs is very attractive.
“Think of a power grid,” said Mahon. “You have to be able to consistently raise capital. You have to be able to apply that capital and achieve a reasonable rate of return. But you also have a captive audience of people who really have to use your asset and that helps you form a pricing strategy, so you are charging the proper amount for your future capital needs. Thankfully, today’s investors have become a lot smarter about paying attention to the details of how all of that is captured in the financials.”
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