Infrastructure investors are at a crossroads, weighing the merits of diversification against targeted strategies. Jamie Storrow, managing director and co-head of infrastructure at Northleaf Capital Partners, argues that diversification is particularly crucial in the current volatile environment. This volatility, while risky, also presents opportunities for managers to make opportunistic investments. The mid-market infrastructure sector is proving to be a hotbed of activity, with several subsectors showing promise.
The energy transition is one area that Storrow believes has a significant future. Decarbonisation and electrification are global trends, despite recent pullbacks. Within this sector, opportunities abound in renewable power, batteries, and assets supporting energy efficiency, such as sub-metering and contracted electric vehicle charging. Communications is another appealing subsector, encompassing towers, fibre, and data centres. Data centres, in particular, require substantial capital and present adjacent opportunities in electricity production. Transport is also a sector of focus, with investments in ports, ferries, and roads. However, Storrow notes that contracted revenue can be challenging to find in transportation.
Diversification is key to a robust mid-market infrastructure strategy. Storrow emphasizes the importance of diversifying across geographies, sectors, subsectors, types of physical equipment, counterparties, and cross-border exposure. This approach helps mitigate risks and capitalizes on opportunities across various metrics. However, maintaining expertise in a range of sectors and markets is challenging. Storrow attributes Northleaf’s success to appropriate staffing, with sector heads and dedicated operating partners responsible for different sectors and regions.
Looking ahead, Storrow highlights several challenges. Minimizing exposure to government policy is crucial, given the current era’s emphasis on cross-border risks, supply chain issues, and inflated prices. Predicting volume-related activities has also become more challenging due to changing macroeconomic forecasts. Despite these hurdles, the US continues to offer significant opportunities, particularly for investments with limited government linkage or cross-border risk.
Geopolitical and macroeconomic trends are reshaping the importance of diversification. Storrow notes that projects or single-purpose companies operating in one country typically have limited or no exposure to cross-border elements, making them highly protective in the current environment. The unpredictable policy environment in the US is also creating investment opportunities with under-capitalised or distressed industrials and developers. The recent turbulence, higher interest rates, and inflationary impact on equipment have led to interesting investment opportunities, particularly in the renewable energy sector.
The implications for the infrastructure sector are profound. As investors navigate an increasingly complex landscape, diversification emerges as a critical strategy. The mid-market infrastructure sector, with its diverse subsectors and opportunities, is poised to play a significant role in the energy transition and broader infrastructure development. However, success will depend on investors’ ability to balance diversification with targeted strategies, maintain expertise across sectors, and adapt to evolving geopolitical and macroeconomic trends. The current environment presents both challenges and opportunities, and those who can navigate this landscape effectively will be well-positioned to capitalize on the sector’s growth potential.