Produced in partnership with KKR as part of ‘The Adviser’s Guide to Investing in Alternatives’. Download the full guide here.
When most investors think about infrastructure, they typically think about roads, airports, utilities and other physical assets that provide an essential service to society. They don’t immediately think about data centres, mobile phone towers and solar energy stations, yet people and economies depend on these services every day.
While utilities and transport infrastructure are still core to many infrastructure portfolios, the definition of infrastructure has broadened significantly in the past 10–15 years, giving investors exposure to a larger set of themes and opportunities, greater diversification, and potentially higher risk-adjusted returns. This development reflects society’s evolving needs and expectations.
Structural changes are also impacting the investment universe.
Over time, many listed core infrastructure assets have been taken private. Similarly, government assets that would have historically been listed or sold to listed entities are instead being privatised. One prime example is land and motor registries. This has led to fewer listed infrastructure assets left, which has in turn driven the growing popularity of private infrastructure among investors. What this means for investors that are entirely focused on public assets is that they are missing out on many compelling opportunities in emerging thematic trends across sectors and regions.
Once the exclusive domain of institutional investors, private infrastructure assets are attracting a broad range of investors because they exhibit the following characteristics:
- Capital preservation;
- Consistent cash distribution;
- Inflation hedging;
- Diversification; and
- Potential upside.
Thematic drivers
KKR has identified three long-term trends influencing global private infrastructure investment: digitalisation, decarbonisation, and deconsolidation.
Digitalisation
Data is the fastest growing commodity, with global IP traffic expected to increase by a compound annual rate of 13 per cent, according to the Global Infrastructure Hub.
As more communities around the world spend more time online, demand for digital infrastructure assets, including fiber optics networks, data centres and mobile cell towers, will increase.
Decarbonisation
While the commitment of some countries and companies to reduce their carbon footprint fluctuates, depending on the politics of the day, there is broad consensus that climate change is a global emergency that requires mammoth and urgent action. Society is pushing for cleaner energy, buildings and transport, and there is a tremendous opportunity to reduce the carbon intensity of traditional fossil fuel energy infrastructure. Representative investment opportunities include solar and wind assets, liquefied natural gas, and district heating and cooling.
Deconsolidation
As industries and corporates seek to create financial value and operational efficiency by divesting non-core assets, there is an increasing range of potentially attractive opportunities. Representative investment opportunities include corporate carve-outs, sale-leasebacks and asset leasing.
A large, addressable market
The Global Infrastructure Hub estimates that closing the infrastructure financing gap will require US$94 trillion by 2040. Additionally, annual infrastructure investment is projected to increase from 3 per cent to 3.5 per cent of global GDP, amounting to approximately US$3.7 trillion per year.
This dynamic has underpinned the exponential growth of global private infrastructure investment, particularly among institutional investors although wholesale investors are waking up to the benefits of global infrastructure too.
Financial advisers are playing a critical role in driving this trend.
They are educating clients about the range of alternative asset classes available to them and the potential role they play in a diversified portfolio, especially in the current economic environment.
Against a backdrop of higher inflation, geopolitical uncertainty and slower global economic growth, many wholesale investors are rethinking their asset allocation, with a sharper focus on alternatives.
Global private infrastructure as an asset class has demonstrated its ability to withstand economic shocks and historically represented lower risk and more stability than publicly listed markets during volatile periods. Pleasingly, wholesale investors increasingly now have access to alternative asset classes, such global private infrastructure that have traditionally been reserved for institutional investors. There is also more education and discussion about the benefits of private market assets, not just the risks.
Andrew Jennings is managing director for Asia Pacific infrastructure, Australia & New Zealand, at KKR.
This is an edited abstract from the Professional Planner Adviser’s guide to investing in alternatives. For insights on opportunities in private markets, download your copy here.
