Private infrastructure offers resilient returns no matter the economic climate

Investing in private infrastructure has attracted a lot of attention in recent years and for good reason.

The asset class offers a unique blend of benefits including predictable cash flows and inflation protection. In a persisting uncertain economic environment, these stable traits are increasingly desirable to investors. Investing in infrastructure also provides the opportunity to develop and enhance businesses that power and operate communities and economies around the world, increasing quality of life and contributing to a more sustainable future.

It’s no surprise then that according to data from Boston Consulting Group, investors globally plan to increase their commitments to the asset class by more than $600 billion over the next three years¹. The desire for more defensive returns is rightly prompting investors to consider whether to increase their allocation to infrastructure. Having worked within infrastructure investment for over thirty years and founded Ancala, a leading infrastructure manager, here are the key reasons from my perspective why investors are increasingly considering private infrastructure.

Requirement for capital

Public sector budgets are constrained. Private investors offer an economically attractive avenue for governments to develop and enhance new and existing infrastructure required to enable economic growth and meet policy goals. The shift in demand towards sustainable energy also presents a once-in-a-generation opportunity for private infrastructure investors as new requirements for generators of renewable energy and the supporting infrastructure needed to store, distribute, and manage this energy efficiently come to the fore.

Our recent investments in Solandeo and Hausheld, fast-growing owners and operators of smart meters in Germany, are perfect examples of this. As part of the German government’s plans to achieve climate neutrality by 2045, it has mandated that smart meters be rolled out nationally to commercial and residential customers.

However, private investment is required to meet this objective. Our investment provides these businesses with the funding required to build on their market-leading positions, deliver their significant order books and meet the fast-growing demand for smart meters – contributing a vital building block in the transition to a more efficient, lower-cost and decarbonised energy system across the country.

Resilient, long-term and inflation-linked returns

Infrastructure companies offer resilient and predictable returns. They provide essential services, such as drinking water, transport and power. As such, they generate steady cash flows, backed by long-term contracts or regulated income which offer an inflation-linked return. This makes infrastructure companies less vulnerable to economic downturns. Financial crises have proven that even through downturns, infrastructure companies should retain their value and continue to generate yield to investors. This makes them a valuable part of any investment portfolio.

Part of this resilience stems from the fact that infrastructure assets are often inflation-linked, either through direct contractual agreements or regulatory frameworks. For example, utility companies typically adjust rates annually based on inflation. This helps preserve the real value of the investment and ensures that returns keep pace with rising costs.

Infrastructure companies and projects also have very long-term operational lives due to operating in sectors that have high barriers to entry and having long-term contracts in place, spanning decades in some instances. These timeframes align with the investment horizons of institutional investors such as pension funds, insurance companies and sovereign wealth funds, which seek long-term growth to meet future liabilities. This stability is particularly appealing in today’s uncertain economic environment, where inflation, fluctuating interest rates and geopolitical tensions create volatility.

Aligning sustainability with financial returns

Investors are increasingly aligning their strategies with their broader societal purpose. Infrastructure offers a tangible way to achieve this, delivering financial returns and creating social and environmental benefits.

There is a significant opportunity to contribute meaningfully to the energy transition. Investors can fund new energy assets that are essential for a low-carbon economy, like offshore wind farms, battery storage, smart grids and EV charging networks.

The energy transition also involves upgrading existing infrastructure. This includes retrofitting power plants with carbon capture technologies, enhancing grid efficiency through digitisation such as smart meters and updating fossil fuel facilities with renewable energy generation. These projects can provide enhanced returns while simultaneously contributing to broader decarbonisation objectives. With the renewable energy market set to grow, investors in private infrastructure can lead this transition.

Ancala recently exited its investment in liquified natural gas asset Dragon LNG at an attractive return. This was supported by our efforts to decarbonise the company’s operations. During our period of ownership, we helped the business optimise its operations and deliver on-site decarbonisation projects such as installing and operating a 10MWp solar park. In addition, Dragon progressed plans to develop a 13MWp wind farm and utilise waste from nearby generation plants.

Realising potential through investing in infrastructure

To get the most out of infrastructure’s potential, investors need a manager with a consistent strategy that provides downside protection and creates value through proactive asset management.

Equipped with this, the asset class offers real opportunity for those looking for resilient and long-term returns, while also contributing to significant socio-economic improvements.

This article featured in German financial news outlet Börsen Zeitung.

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References

1 – https://www.bcg.com/press/18march2024-private-equity-infrastructure-investment-set-to-rebound