As we look ahead in this report to the future of the asset class, the mega-trends of decarbonisation, digitalisation and evolving demographics will no doubt continue to influence – and in many cases even characterise – investment activities. But what these investments will all have in common is a mission to create value, embrace change and, most importantly, improve the lives of the communities they serve.

There is a more immediate challenge to tackle first, however. In the midst of a global energy security crisis, inflation is soaring and interest rates are being hiked to compensate, creating a perfect storm for recession in most of the world’s largest economies.

While the industry is generally confident that infrastructure assets will be resilient enough to be able to ride this out, the ability to generate alpha becomes more important than ever in these pressured conditions. “If interest rates rise then the role of financial engineering in value creation falls,” says Gordon Bajnai, head of global infrastructure at private capital advisory Campbell Lutyens. “Going forward, GPs will differentiate themselves based on their development and operational value creation capabilities.”

This emphasis on creating value through a more active approach to asset management plays out in several strands, from prioritising decarbonisation to improving operational efficiencies and processes with technology.

Power play

The energy transition has never felt as urgent as it has this year, with security of supply a new worry for governments in light of events in Ukraine. The introduction of significant regulation in the form of REPowerEU and the Inflation Reduction Act reflects this, with their efforts to boost investment beyond renewable energy generation. This should spur greater investment in battery storage to help stabilise the grid, alternative fuels such as green hydrogen and other renewables-based conversion technologies, waste-to-energy processing and energy efficiency solutions.

“Achieving net zero is about far more that just energy generation,” says Laurent Chatelin, infrastructure partner at Eurazeo. “We also need to focus on the decarbonisation of other forms of infrastructure including transport, buildings, water and waste management, as well as upgrading energy networks.”

Other areas set to attract more institutional interest going forward include carbon capture and storage technologies, recycling and waste-sorting infrastructure, and smart applications to improve grid monitoring and efficiencies.

Looking ahead, expect every sector of infrastructure to come under a decarbonisation lens, too. Evaluating ESG in construction and in the supply chain, for example, and reducing the environmental impact of data centres: if they are not already, such considerations will become priorities for sustainability-focused investors. Or, indeed, any investor looking to create value for their LPs and strengthen the resilience of their portfolios in a fast-changing world.

Getting technical

Technology is a central axis in the investment themes set to shape infrastructure’s next chapter.

In middle and back offices at fund managers especially, technologies such as artificial intelligence and machine learning (ML) are beginning to disrupt. “There’s a genuine push for all projects that bring in more technology to make processes more efficient, more transparent and cleaner,” says Kanav Kalia, chief sales and marketing officer at technology solutions provider Oxane Partners.

Performance management – which is usually a manual process – is an example of an area where AI/ML could help to improve efficiencies and the quality of information for infrastructure firms. “They typically receive a lot of information, including project monitors, engineering reports, feasibility reports and reporting from on-the-ground personnel,” says Kalia. “Typically this is all shared manually in PDFs and Excel files. AI and ML has a lot of potential in digitalising this performance data at source and automating the processing of this data – and there is a lot of value-add to this.”

In the asset class more broadly, an infratech revolution is well underway. Across all sectors of infrastructure, advanced digital technologies are increasingly being applied to aid both the delivery and ongoing operation of projects. Outcomes range from enhanced sustainability monitoring, improved performance, streamlined operations and even, in some cases, the continued operation of infrastructure without human involvement – the latter particularly pertinent following two years of continual lockdowns.

When it comes to applying novel technologies in infrastructure, however, there is disruption in more than one sense of the word. To factor underlying technology into the operation of an asset carries a risk of technological obsolescence further down the line, which could affect demand and operational capabilities. What’s more, contracts for infrastructure projects are typically long term and asset lifecycles even longer. This creates a case for shorter or more flexible contracts, or even alternative financing arrangements, to accommodate the speed of technological change and disruptive innovations.

Driving change

We are all aware of the global economic impact of covid-19. Beyond even that, the social changes that the pandemic both forced and inspired will have ramifications for decades to come in the realm of infrastructure design and development. For trends such as the energy transition and digital transformation, the impact has largely been to accelerate the flow of capital to assets such as renewables platforms, green fuel technology, battery storage, data centres and fibre networks.

But in other sectors, key focus areas have been heavily influenced by the disruptive impact of covid-19. Shifts in mobility trends, for example, are being driven by heightened priorities such as personal space and hygiene – an overcrowded journey on a bus or train is no longer essential for the increasing proportion of people who are available to exercise the option of working from home. In line with the slew of businesses working to improve the space, flexibility and attractiveness of their office space to attract workers, urban transportation faces a similar need to evolve if passenger numbers are to recover.

313

Total number of infra funds on the road

$200.7bn

Aggregate capital targeted for infra funds in market

40%

Share of aggregate target capital accounted for by the top 10 funds in market

Such considerations, alongside the urgent need to decarbonise, will shape transport’s next decade. “We believe that the transformational change in the transport sector will be driven by four technology-driven disruptive trends: electrification, autonomous vehicles, on-demand shared mobility services and connected vehicles,” says Ed Diffendal, managing director, co-head private infrastructure Americas at Partners Group.

“Some of the sectors we think will offer infrastructure investors the most attractive opportunities include electric vehicle charging infrastructure, fleet electrification and telematics and urban smart mobility platforms or electronic toll collection platforms. These investment opportunities are part of our transformative theme of ‘New Mobility’.”

Themes such as these reflect the intended migration of urban infrastructure onto a cloud-based network managed through smart applications. “Charging infrastructure has laid the foundations for smart living, supporting potential future Internet of Things’ technologies, such as 5G antennas, parking sensors and air monitoring systems which provide real-time data on street-by-street air quality,” says Chris Pateman-Jones, CEO of EV charging solutions provider Connected Kerb. He emphasises the inherent link between smart technology and sustainability, too: “Smart cities are central to a net zero future.”

Every sector of infrastructure is on a trajectory of transformation right now. And with $131.6 billion raised by infrastructure funds in Q1-Q3 2022 – the highest amount in any Q1-Q3 period to date – and the possibility of a new annual fundraising record looking quite likely, there is little sign of any reticence to change among investors.

They said it

Key focus areas for the infra industry

“Despite the comeback of fossil fuels in the energy mix, the shift to low-carbon energy will only accelerate”

Julien Bedin
Partners Group

“The energy transition will likely lead to the development of natural capital as a standalone asset class”

Paul Buckley
FIRSTavenue

“Access to safe, on-demand and green mobility is becoming critical to emerging consumers”

Nakul Zaveri
LeapFrog Investments

“It wouldn’t be wrong to say that the impact of technology is touching every corner of private markets now”

Kanav Kalia
Oxane Partners

“The technological revolution is attracting significant private investment capital to the [agriculture] sector”

Alastair Cooper
Cibus Capital

“CCS is not new. It [has] been a viable approach to building developments for a long time”

Ivan Rodriguez
Bridges Fund Management