Infrastructure, including utilities, telecom systems and other crucial components of modern society, is on the verge of a transformative period, and individuals have the opportunity to contribute to this process. While emerging economies require a range of essential services, particularly in rapidly growing cities, developed economies need to renovate aging infrastructure such as bridges and water utilities. Additionally, the transition toward a greener global energy future and the establishment of a more advanced and digitally connected society necessitate substantial construction efforts.
However, the capital required for these infrastructure projects far exceeds the capacities of governments alone. For instance, experts predict that cities will need to add more than 2 million miles of power cables and over 4 million miles of water and sewage pipelines by 2050. This exemplifies why the private infrastructure market is poised for significant growth in the coming years.
Investing in infrastructure also offers the potential for strong returns. One key factor contributing to this is that infrastructure is not optional but essential, continuously required regardless of the state of the economy. Moreover, infrastructure investments, including real assets, typically have a different return pattern than stocks or bonds, making them valuable as uncorrelated diversifiers. Additionally, due to the link between utility rates and cost-of-living increases, infrastructure investments provide an implicit hedge against inflation.
Infrastructure investments offer a unique combination of benefits, including meaningful protection against inflation, portfolio diversification, consistent cash flow potential and historical outperformance during volatile periods. These opportunities are not easily found elsewhere in the investment landscape. The following reasons make an interesting case for investing in infrastructure.
Infrastructure requires a massive influx of capital
With the global population projected to increase by 2 billion people by 2050, cities worldwide are faced with the pressing need to expand essential services such as clean water, energy, fiber-optic lines and transportation systems. This population growth, coupled with the increasing reliance on technology, will drive steady growth in digital infrastructure investments, creating a significant demand for networks and data centers.
In particular, the regional data-center market is heavily influenced by Saudi Arabia and the UAE, as these countries have implemented comprehensive economic transformation strategies. Their proactive investments in cloud computing, coupled with competitive business laws and robust technological infrastructures, have positioned them as dominant players in the market. Consequently, the information and communication technology sector is expected to continue its upward trajectory in the coming years.
Infrastructure is historically resilient when growth slows and less volatile than stocks and bonds
The case for infrastructure investment is highly compelling, particularly considering its track record of relative stability. In 2022, when global markets experienced a steep decline of 17.7 percent and bonds fell by 11.2 percent, infrastructure investments remained resilient. Not only does infrastructure provide stability, but it also offers a reliable income stream and, on occasion, significant returns for those willing to prioritize long-term investments over immediate liquidity. These attractive qualities have drawn the attention of private investors, and we anticipate that valuations for infrastructure assets will continue to benefit from ongoing inflows of capital.
Regardless of whether this year brings a recession, slower economic growth, or continued rate increases by central banks to combat inflation, we expect to see persistent market dislocations. Inflationary conditions, in particular, present an opportunity for utilities within the infrastructure sector. Utilities have the ability to pass on cost increases to customers through various mechanisms, making them an appealing source of income for investors. Specifically, investors may want to focus on infrastructure assets that offer contracted, regulated, and inflation-indexed income.
Furthermore, core infrastructure investments have historically performed well throughout economic cycles, demonstrating their resilience against market and economic shocks. This resilience can help mitigate the impact of such shocks on investment portfolios, ensuring consistent cash-flow returns from these “essential” assets.
Energy transition to decarbonization drives investment opportunities
There is a global push to replace fossil fuels with renewable energy, and this transition extends beyond a few specific industries like transportation, automotive, and manufacturing. One crucial area that requires decarbonization is electricity generation, which may incur higher costs than what headlines often suggest.
Renewable energy is gaining momentum in the Middle East as well, with countries increasingly focused on boosting their renewable energy capacity. For instance, Saudi Arabia has set a target, as part of its Green Initiative, to generate 50 percent of its power from renewable sources by 2030. Similarly, the UAE’s Energy Strategy 2050 aims to achieve 44 percent utilization of renewable energy, with a particular emphasis on solar power.
To achieve their net-zero goals by 2030, economies worldwide will need to see exponential growth in wind-power capacity, solar-generation capacity, and notably, battery-storage capacity. This shift demands substantial investment, with global forecasts estimating a requirement of $750 billion per year. Consequently, a wide range of private market opportunities arises, spanning from venture capital investments in breakthrough technologies to later-stage buyouts focusing on well-established and successful enterprises across all sectors of infrastructure.
Overall, investing in infrastructure not only provides avenues for sustainable investing but also presents significant growth opportunities. As regional governments prioritize the development of digital, energy, and construction industries, private investors have the chance to contribute to these long-term economic goals. Envisioning and constructing the future can be both exciting and profitable for all involved.
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