As inflation surged two years ago, infrastructure valuations felt the heat from rising interest rates, yet their intrinsic inflation-proof qualities showcased a remarkable resilience. The numbers tell a compelling story: the Cambridge Associates Infrastructure Index reveals that private infrastructure has only faced one negative quarterly return over the last ten quarters, while global equities and bonds have stumbled more frequently. Now, with interest rates on the decline and GDP growth picking up steam, the infrastructure sector is gearing up for a promising 2025.
Aizhan Meldebek, global infrastructure strategist at Macquarie Asset Management, paints an optimistic picture, suggesting that “multiples may have found a floor” and expects that with falling interest rates, valuations will begin to climb. This comes on the heels of robust GDP growth, which should enhance earnings potential. Meldebek anticipates returns in the “11-12% range next year,” a tantalizing prospect for investors who have been navigating a bumpy road since the beginning of 2023.
Despite a prolonged slowdown in fundraising this year, as highlighted by Preqin’s latest report, there’s a glimmer of hope on the horizon. The asset class raised about $70 billion in the first three quarters of 2024, almost reaching three-quarters of the total raised in all of 2023. Meldebek is confident that fundraising will rebound, driven by existing investors ramping up their allocations and a broader base of new investors coming into play. The annual Hodes Weill survey indicates that investors have upped their target allocations by 42 basis points to 5.5%, hinting at a strong appetite for infrastructure investments.
Falling interest rates are also set to boost transaction volumes and M&A activity, according to Charlie Garrood, global head of infrastructure, M&A and transaction solutions at Aon. He notes that further reductions in interest rates will help bridge the valuation gap between buyers and sellers, thus spurring an increase in M&A deal volumes. By the end of Q3 2024, infrastructure deal activity had reached around 65% of the total value for the whole of 2023, a clear sign of the sector’s resilience.
The landscape is evolving, with structural trends like the global energy transition and digitalization acting as catalysts for growth. Tania Tsoneva, head of infrastructure research at CBRE Investment Management, asserts that infrastructure is entering a defining age. The rapid digitalization of society and the pressing need for enhanced digital and power infrastructure will drive demand. Moreover, Nils Rode, CIO at Schroders Capital, points to the emergence of generative AI as a new cycle of technological innovation, promising impacts that could rival past technological disruptions.
Politics, however, remains a key player in shaping the future of infrastructure investments. Hugo Llewelyn, CEO of Newcore Capital, emphasizes that governments in developed nations will grapple with budgetary constraints while attempting to balance taxation and spending. This scenario creates a tailwind for private capital, which is increasingly necessary for investing in crucial societal assets. In the UK, the new Labour government faces the daunting task of overhauling a crumbling infrastructure while managing public finances. Proposed initiatives like a National Wealth Fund aim to invest in future industries, aligning with market tailwinds in renewable energy and data centers.
In the EU, regulatory frameworks are evolving to bolster renewable investments, as seen in the ambitious Renewable Energy Directive III. Nicole Arnold from Commerz Real highlights the potential for pension funds to allocate more capital to energy transition assets, driven by new quotas. However, challenges remain, with Pieter Welman from Barings cautioning that political hurdles could delay many deals in Europe, while the US is expected to outpace Europe in M&A activity due to a robust economy.
As infrastructure braces for a transformative period, the interplay of economic forces, technological advancements, and political dynamics will undoubtedly shape its trajectory. The potential for double-digit growth in key sectors like battery energy storage and digital infrastructure sets the stage for a vibrant future. Investors would do well to keep a keen eye on these developments, as the infrastructure landscape is poised for significant shifts in the coming years.
