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Infrastructure’s resilience and predictability through macroeconomic cycles means the sector continues to attract capital. In the following insight, we discuss the powerful drivers and themes behind the growth of infrastructure investment and explore the future opportunities for investors - from re-thinking transport and utilities to rolling out digital infrastructure.
The investment case for infrastructure keeps building. The transition to net-zero, structural underfunding and the macroeconomic backdrop have provided strong tailwinds for this diversified asset class. The UK government is also bullish and is poised to mobilise private capital as well as deploy public money.
What is infrastructure?
Infrastructure is essentially a set of organisations and structures that allow economies to function. It spans a broad range of areas, from physical transport networks and power generation to digital infrastructure. Its counterparties are often government departments or entities that exist within highly regulated structures.
Infrastructure projects typically have a degree of inflation adjustment to their cash flows, so revenue streams generated from these assets can adjust and grow in real terms and can insulate against the eroding impact of inflation. This means investors can have a degree of confidence that they are protected in an inflationary environment due to the long-term nature of infrastructure assets and the longevity of contracts associated with the projects.
There are three core stages of project development in infrastructure: greenfield, brownfield, and secondary.
- Greenfield: With greenfield investing, a company builds from the ground up. Investors will also support the maintenance once the project is designed and built.
- Brownfield: Investment happens when a company takes ownership or leases an existing facility. Brownfield projects tend to be lower risk, as they may be partially operational and delivering a stream of income.
- Secondary: Secondary assets require no development or maintenance. They tend to be fully operational, cash-generative projects, which inherently carry lower risk than either greenfield or brownfield
Infrastructure is evolving into a mature asset class that attracts large capital investment from global institutional players. But the combination of high-yield and comparatively low-risk characteristics is drawing interest from private investors.
Private investors now play an important supporting role by providing funds to the underlying infrastructure asset managers through investment trusts or other vehicles, deploying capital into physical infrastructure projects and other essential services to society.
Behind the rapid adoption of infrastructure into investment portfolios is a combination of powerful structural, political and macroeconomic drivers.
Back on the political agenda
The outgoing Prime Minister, Boris Johnson, has outlined a raft of funding commitments, with £4.8 billion pledged for infrastructure investment in towns across the country and £26 billion for public capital investment to hit emissions targets, as part of a “levelling up” initiative to raise living standards outside the London area.
The UK is also beginning to make steps towards net zero and is aligning with the UN Sustainable Development Goals (SDGs). That said, to achieve the SDGs by 2030, annual investment requirements across all sectors have been estimated at around $5-7 trillion globally. Current investment levels are far from the scale needed.
Changing the direction of travel
Spending committed by the government will feed directly into public transport and mobility infrastructure. Within this sector, a number of emerging environmental and social themes have brought common methods of transport into question. For example, the 21st century will see the dominance of the car challenged.
The next generation of consumers is no longer wed to car ownership. Now the popularity of car leasing or vehicle sharing offers flexible all-inclusive contracts that give the user access to a fully insured and maintained car for a single monthly payment.
The electrification of cars is a common topic debated by investors and policymakers alike, but one big challenge remains: preparing energy infrastructure that is ready for mass use. Our partners at energy suppliers, charging networks, OEMs, local councils and the grid all say this is one of the main obstacles to the adoption of EVs.
With the decline in car ownership, public transport increasingly cements its place as the cornerstone of many people’s daily travel routines. In London, it is estimated by TFL that 45% of the capital’s 27 million daily trips are taken on trains and buses. At peak times (commuting hours) that percentage is much higher.
With demand for transport always on the rise, there is a huge opportunity to create new efficiencies with our current infrastructure through the injection of well-directed public and private investment.
Harnessing the digital revolution
Digital infrastructure is at the heart of creating an economically viable future for the UK. It is also an enabler of essential services and social well-being within rural communities – where rolling out fibre optics, for example, can help to advance and transform marginalised economies.
Data infrastructure has emerged as one of the most rapidly evolving subsectors. It is critical to the delivery of services and the lifeblood of the economy whether that’s the provision of utilities, facilitating supply chains or even media and communications.
Underpinning growth in the area is a digital revolution where physical processes are being replaced by digital ones. This megatrend has been accelerated by industries and economies creating and storing ever-greater amounts of data.
For example, the World Economic Forum estimates that industrial data is doubling roughly every two years. The global institution found that in 2021, industries created, captured, copied and consumed 74 zettabytes of data – by 2023 that is estimated to rise to 130 zettabytes. On top of this, it is estimated that adults in the UK now spend more than a quarter of their day online, creating a vast amount of data for companies to process.
Many companies are beginning to struggle to make sense of the deluge of data being generated by commercial and domestic sources. Indeed, according to research by industry analysts Forrester, between 60-73% of data collected by enterprises sits dormant.
The influx of newly created data needs to be organised, structured and analysed. Only then can the intelligence and insights that drive value for companies and the wider economy be unlocked.
Data centres – storing value
As businesses and individuals produce more amounts of data, there is a greater need for sophisticated and safe storage. A data centre houses technology systems that are used to store data, transferred to and from the site via communications cables.
We led the funding process for British data centre developer Kao Data to secure £33 million ($41.5m) in funding for a large data centre campus located just outside London. The raise was an important milestone in the innovative development project, emphasising the continuing commitment by investors to the UK’s digital infrastructure.
Kao Data develops and operates high-performance data centres for advanced computing. With hyper-scale-inspired facilities, Kao provides enterprise, cloud, HPC and AI customers with a world-class home for their computing storage. Each data centre is able to support up to 8.7MW of IT load and uses 100 per cent renewable energy in its data centre operations.
In order to perform its role properly, a data centre needs a significant amount of real estate to house the large amounts of hardware. As data demand grows with technological advancement, as will the requirement of investment to facilitate its proper management.
We face mounting economic, environmental and social problems if infrastructure fails to meet present and future demands. Fortunately, the political will is now in place and the opportunity to invest in innovative infrastructure to support a growing and vibrant economy. This in turn will help generate long-term, sustainable returns for investors and provide benefits to society and the environment.
Find out more about investing in Downing's listed infrastructure fund.. Or read how Downing is investing in the UK's infrastructure.
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein.
Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term and are higher risk compared to investments solely in larger, more established companies.
Important notice: This document is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.