This article is sponsored by Ares Management, Digitalbridge, Energy Infrastructure Partners and Partners Group
Who better to talk to about the future of infrastructure investing than the future leaders of the industry? We assembled a constellation of talent from Infrastructure Investor’s inaugural Rising Stars list to discuss some of the key trends that will shape the asset class over the decades to come.
The consensus is that it is an exciting time to be in infrastructure, particularly as the energy transition ramps up.
“If you look at the different sectors that today are going through a major change, where the stakes are the highest, and where there are major opportunities for talent to make a positive impact, energy and energy infrastructure stand out,” says Tim Marahrens, partner at Energy Infrastructure Partners. “There is a once-in-a-generation change happening here.”
With governments around the world focused on achieving net zero by 2050, it looks unlikely that energy transition specialists will be out of work anytime soon. “Safe to say, energy infrastructure will keep me busy until I retire,” says Marahrens.
Steve Porto, partner at Ares Management, agrees that the asset class is an enticing environment for new recruits. “The things that still attract young talent to the space are the same things that attracted me – infrastructure sits at the intersection of the environment, technology, policy and finance,” he says. “For that reason, it’s a dynamic and exciting industry to work in…
“In my career, I’ve always had a continuous learning process and I think that’s still available for folks entering today.”
“From when I first entered this industry, the [digital infrastructure] sector only continues to become more nuanced, relevant and growth-orientated. That creates new and interesting opportunities for value creation”
Of course, opportunities in infrastructure are not limited to energy. Digital infrastructure is another booming sector.
“From when I first entered this industry, the sector only continues to become more nuanced, relevant and growth-orientated. That creates new and interesting opportunities for value creation,” says Manjari Govada, a principal at DigitalBridge. “It has been incredible to see – and be a part of – the growth we’ve had in the sector, and it seems like that’s drawing a lot of interest from folks that normally wouldn’t see infrastructure as a particularly interesting or high-growth industry.
“People are realising the impact that comes from digital infrastructure – there’s a really tangible element to everything that we do.”
A ‘known unknown’ of the energy transition is that many of the technologies that will be vital for decarbonising the global economy are yet to reach commercial scale. The International Energy Agency estimates that 35 percent of the emissions reductions needed to reach net zero by 2050 must be delivered by technologies not yet on the market.
Nicholas Pepper, a member of management in Partners Group’s infrastructure team, says investors must think strategically to help scale emerging technologies. “As thematic investors, we take a view on sectors and investments that spans decades. We need to consider how the platforms that we invest in are going to develop in the long term.
“Technologies that aren’t technically or commercially mature today will likely become so over time,” Pepper continues. “And as these technologies mature, we can play a key role in enabling them to reach their full potential by scaling them up.”
Marahrens also notes that platform investments can be an ideal way to scale new forms of infrastructure. “We really believe in platform investments,” he says. “Energy infrastructure platforms beautifully embody all the features that private equity investors look for: the ability to scale, oftentimes while diversifying and de-risking themselves; and the ability to accommodate large amounts of investor capital while preserving an attractive return profile.”
But Pepper caveats that infrastructure investors need to remain disciplined. “We can pivot platforms into new technologies, and, in some cases, we can consider investing into technologies that are at an inflection point. But we’re investing into these growth areas without giving up a fundamental characteristic of the asset class, which is downside protection and resilience.”
“As thematic investors, we take a view on sectors and investments that spans decades. We need to consider how the platforms that we invest in are going to develop in the long term”
Porto also emphasises the importance of discipline. “We are not interested in taking technology risks,” he says. “If the technology is proven, what really makes or breaks a deal for us is whether the company has demonstrated an ability to scale.”
Porto points to plentiful opportunities to invest in newer forms of infrastructure without taking technology risk. According to BloombergNEF, global investment in the energy transition totalled $1.1 trillion in 2022, of which less than half was directly invested into renewable energy. Other technologies, including electric vehicles and associated infrastructure, attracted tens of billions of dollars of investment.
“We’re going to follow decarbonisation as it spreads throughout the economy,” says Porto. “Decarbonising the major ingredients of modern life – plastic, steel, ammonia and cement – is a big focus for us.”
Decarbonising these industries ultimately depends on having access to renewable energy – and the rollout of renewables has hit some bumps in the road recently. “Most of the decarbonisation pathways start with a clean electron,” says Porto. “One of the challenges we’re all facing right now is that the cost of renewables, which was decreasing for two decades, has started increasing over the last two years or so due to inflation and supply chain challenges.
“We need costs to stabilise so that businesses and projects focused on decarbonisation can make investment decisions that rely on these cheap and clean electrons.”
The prospects of prices stabilising will depend partly on supportive government policies. Policy signals can have a major impact, as the US Inflation Reduction Act has shown in stimulating green investment. “Policy is certainly helping to offset the recent price increases,” says Porto – though he believes US policymaking can still improve.
“The IRA is struggling to reach its potential since the government has been slow in issuing some of the supporting guidance. The guidance on green hydrogen is still forthcoming, and the guidance around domestic content wasn’t as clear as we think it could have been.”
Overall, Porto expects governments to play a positive role. “We ultimately think that the widespread preference for clean energy is going to continue to keep policy supportive in the long term. There may be some episodic swings, which of course will be frustrating and disruptive. But, big picture, we think that the global preference is towards clean energy, and that will continue to create long-term supportive policy.”
Inclusivity key to infra’s future
Large firms are looking to improve diversity in their hiring practices, seeking to build a workforce that looks more like the societies they serve
Diversity and inclusion is “a topic near and dear to my heart”, says Manjari Govada, principal at DigitalBridge. She says that the investor is focused on attracting talent from a wide range of backgrounds. “We have found it’s important to try and capture a diverse pipeline of hires as early as possible in their careers. Attracting folks to our dynamic sector early and nuturing their development takes time and effort – but that investment is worth it.”
Nicholas Pepper, member of management at Partners Group, designed the firm’s financial analyst programme for graduates and oversaw the programme globally until 2022. “Diversity and inclusion are core values of the programme,” he says. “In our summer internship programme, we specifically look to hire individuals from backgrounds that are under-represented in the private markets industry.”
Tim Marahrens, partner at Energy Infrastructure Partners, underlines the value of diversity for the asset class. “Complex teams that include different cultures and different backgrounds are proven to better solve more complex projects,” he says. “We are dependent on sourcing talent globally. Our team of energy specialists consists of around 25 nationalities, so operating in a very diverse and inclusive environment is key to us.”
Marahrens adds that investing in infrastructure is a way to break down barriers within societies and produce benefits that are widely shared. “Energy infrastructure is a little like central banking – the decisions we make shape economies, and everyone participates.” This means, he says, that the industry is “intrinsically inclusive”.
“Also considering our clients – many of them Swiss pension funds – we are helping secure the retirement income of the Swiss workforce,” says Marahrens. “We often say the staff that cleans our office are the client, which is true in our case, and we feel that responsibility on our shoulders every single day.”
Avoiding uncertainty is essential if investors are to be persuaded to accelerate the energy transition, says Marahrens. “If there’s one thing that policymakers need to take into consideration when establishing the right framework for the energy transition, it’s stability. Especially with long-term, large-scale investments, it’s hard to think of anything more important.”
Stability is much more important than subsidies, he says. “If you look at current levelised costs of electricity, there’s no doubt that renewables can thrive in a subsidy-free world. It’s just basic – you don’t have to pay for wind, water or sun as an input.”
Meanwhile, Pepper points out that government policy is only one piece in the puzzle. Indeed, many large industrial facilities are looking to commission their own supply of renewable power.
“We don’t just look at governments,” he says. “Corporates also have very strong net-zero commitments, with decarbonisation targets for 2050 or even earlier, and they’re looking for solutions to reduce their carbon footprint, such as purchase power agreements or carbon dioxide removals.”
While investors are rightly focused on attempting to mitigate climate change, they also need to think about adapting to its inevitable impacts.
“From a climate change perspective, we have seen the level of resiliency necessary to build into our assets now and over time,” points out DigitalBridge’s Govada. “If a data centre is close to a body of water, the flood risk might be increasing from a once-in-1,000-years event to something that’s not as rare. There’s certainly more work being done by DigitalBridge and our portfolio companies to understand the risks as extreme weather events become more frequent, and to continue to bring a sustainability mindset to our operations.”
“The way we approach climate change resilience is similar to a reinsurance company – through the power of diversification”
Energy Infrastructure Partners
As well as physical risks, rising temperatures will affect the business models of some assets, notes Pepper. “If you’re looking at a platform that provides heating services,” he says, “you’ll want to factor into underwriting that the annual number of days during which you’re going to be running heating could be coming down, and that will directly affect the business plan.
“We need to consider appetite for assets at the time of exit in a world that’s in transition, where public opinion on certain types of assets can sway demand. This requires a clear strategy to future-proof assets from the outset.”
For Marahrens, improved resilience is another benefit of investing in platforms. “The way we approach climate change resilience is similar to a reinsurance company – through the power of diversification,” he says. “Even though we have expertise in investing in some of the biggest onshore wind farms ever built in Europe, we are increasingly moving up the value chain and investing in development platforms.
“It means we’re exposed to dozens if not hundreds of generation assets through one position, oftentimes across different technologies and jurisdictions. It’s a very pragmatic way to reduce concentrations that could create vulnerabilities.”
Beyond the energy transition, one of the most transformative trends is the rise of artificial intelligence – and the digital infrastructure sector is poised to benefit.
“We’re seeing incredible amounts of capital going into AI. The global AI market is going to be $2 trillion-plus in the next five-10 years, and we estimate over 10GW of data centre capacity will be needed to serve that just in the next five years alone,” says Govada. “A significant amount of capital will be needed to meet this demand and make the AI revolution a reality – through facility build-out and all the other layers of needed infrastructure.
“We are looking at the landscape and testing whether there is sufficient infrastructure capacity in this space to serve expected AI-related needs within the timeline that customers ultimately want to deliver upon.”
Porto notes that the rise in data centre demand has major implications for energy infrastructure. “The real tangible thing we’re seeing right now is the demand from the hyperscalers to build data centre capacity. The large players are committed to net zero, which means the increase in data centre capacity has a knock-on effect of increasing demand for clean energy.”
“The things that still attract young talent to the space are the same things that attracted me – infrastructure sits at the intersection of the environment, technology, policy and finance”
“In the past, we thought of digital infrastructure as being separate from renewables and energy transition, but AI and the huge demand for data is interlinked with this huge demand for clean energy and the broader category of sustainable infrastructure,” says Porto. “Investing in green digital infrastructure, and particularly helping data centres become more sustainable, is an exciting part of our strategy.”
Meanwhile, AI can help the energy networks of the future to function more effectively. “AI can facilitate real-time matching of supply and demand in the energy sector,” notes Marahrens. “This matching function will continue to become increasingly important, especially as we make greater use of intermittent and increasingly decentralised energy sources.”
AI is already being used by investment teams to help streamline their work. “We have developed a ChatGPT-type model for all employees at Partners Group, which can help investment teams save time and focus on the highest-value activities,” Pepper says. “It can collect and aggregate data from different sources, which lets us concentrate on the analysis and decision-making.”
Another long-term theme is the need to upscale infrastructure in emerging markets. Meeting the UN’s Sustainable Development Goals will require an extra $4 trillion a year until 2030, according to the UN Conference on Trade and Development.
The challenge is an exciting one, says Pepper. “One common theme when we are looking at these kinds of markets is that there is a true opportunity to build out essential infrastructure – whereas in developed markets, you’re more likely to be focused on upgrading or renovating existing infrastructure.”
He adds that investors need to understand the local context. “Investing in countries that are considered emerging is highly nuanced. You need boots on the ground and actual knowledge of the country and its workings to not only adequately assess risks but – even more importantly – to manage investments and realise value for clients. You can’t do that from the other side of the world.”
Managing risks, particularly around currency fluctuations, is not easy – but solutions can be found. “What we have found comfort in, when investing in EMs, is following the logos,” says Govada.
“We have been successful in working with local partners while bringing our global customer relationships to structure deals to generate attractive risk-adjusted returns. One example is by having customers pay us in a dollar-denominated manner, which allows us to then de-risk at least one component of investing in those markets and increase the overall financeability of these assets.”
Govada is enthusiastic about the opportunity for infrastructure to deliver economic benefits in Africa, Asia and Latin America. “Infrastructure is often the first asset class to enter into emerging markets – the investments in infrastructure lay the foundations for future investment in the wider economy.”
Meet the panel
Principal, DigitalBridge Group
Govada is a principal at the DigitalBridge Group. Govada joined the global digital infrastructure investment firm in 2017, relocating from DigitalBridge’s New York office to London, where she is now based, the following year.
Member of management, private infrastructure Europe, Partners Group
Pepper joined Partners Group in 2015 and today is a member of management, private infrastructure Europe. He takes part in fundraising and deployment for Partners Group’s infrastructure and PG LIFE funds from the firm’s Zug office.
Partner and co-head of investments, Energy Infrastructure Partners
Marahrens is partner and co-head of investment at Energy Infrastructure Partners. Based in Zurich, Marahrens joined the global investment manager as a junior in 2014, before being promoted to partner with a focus on investments.
Partner, Ares Infrastructure Opportunities, Ares Management
Porto is a partner at the Ares Infrastructure Opportunities Group. New York-based, he joined the firm in 2018 as principal and has since led AIO’s shift into renewables, climate infrastructure, green digital and circular economy investments.