Infrastructure: A Profitable Haven for Private Markets
By Max Murski
The streets we drive on, the buildings we work in and the electricity that powers our cities all have something in common, they’re part of what we call infrastructure. For many, infrastructure signifies the backbone upon which a city is constructed or the essential components necessary for a city’s functionality. To those gauged with a financial mindset, infrastructure presents itself as a dependable and opportunistic investment. Historically, the landscape of infrastructure was predominantly supported by federal governments with operations extending into provincial and municipal domains. The government's pivotal role in supporting infrastructure can be traced back to the economic prosperity it provides to the general population.
As transportation, communication, and other essential components evolved, cities transformed into massive financial markets capable of managing substantial volumes of human activity. The everlasting necessity and the capital intensive nature of infrastructure prompted the privatization of specific infrastructure assets. In such instances leaders of major financial institutions have historically seized the opportunity to invest in these infrastructure projects, as they have recognized the potential for robust returns.
Today, private infrastructure investment activity energizes the capital markets, driving various activities from mergers and acquisitions to high-profile financing for substantial transactions. This sector asserts its role in creating thousands of vital jobs, particularly within large financial institutions. In the past year alone Canadian infrastructure has seen a notable increase in investment activity, with a forecasted 50 M&A deals by the end of the year. In contrast, private infrastructure investment in low to middle income countries has increased 23% since 2021. This indicates an active market, demonstrating a reversal from the slow market over the last two years due to industry headwinds. These transactions span a diverse range of sectors, including utilities, telecommunications and transportation showcasing the versatility and depth of infrastructure investments. The increase in infrastructure deal flow reflects the surge in mid-market acquisitions and slowed growth in billion dollar deals, highlighting the resilience of infrastructure.
Current trends in infrastructure are marked by the drive in digital transformation that leads to spending in the realm of information technology, offering opportunities in areas like data centers and cybersecurity. Simultaneously, there is an increased focus on clean energy options like renewables. Reflecting those trends, the top performing industries in private infrastructure investments continue to be renewables and energy, with these sectors consistently attracting significant capital. Their dependability and growth potential make them opportunistic and attractive to investment.
Leading the charge in private infrastructure investment are dominant players such as Macquarie Asset Management, Brookfield Asset Management and Global Infrastructure Partners. These industry giants have been pivotal in shaping the landscape, leveraging their expertise to navigate complex deals and contribute to the sector's overall growth. Notably the spark in activity has had a positive impact on funds, raising substantial capital for large institutions. In the last year Goldman Sachs Asset Management arm raised $4 billion for a mid market infrastructure investment fund. Brookfield Asset Management also managed to raise $28 billion for global infrastructure debt investments, making it the world's largest private infrastructure debt fund. Lastly, KKR closed its $17 billion dollar global infrastructure fund in 2022.
The private sector's increasing interest in infrastructure investment is supported by three primary factors. Firstly, investment in infrastructure is attractive due to the low volatility of the industry. This is due to the fact that most infrastructure projects are typically involving a source of energy, transportation, or utilities. These sectors are able to provide long term contracts that are commonly supported by governments or other large institutions. These long term contracts provide a strong sense of predictability which can mitigate financial risk. Consequently, this characteristic makes infrastructure investments an attractive option for institutional investors seeking reliable returns over an extended period.
Secondly, due to the predictability of cash flows and the nature of infrastructure as a non cyclical investment. It makes infrastructure investments very financeable, contributing to the private sector's eagerness to invest. Banks are able to lend mass amounts of capital to investors with confidence in the borrower's projects. This two way relationship works phenomenally well for private equity groups as they look to leverage their investments to maximize their internal rate of return.
Lastly, high barriers to entry serve as a significant driver for private sector involvement in infrastructure projects. The substantial capital requirements, complex regulatory environments, and technical expertise needed to initiate and manage large-scale infrastructure developments act as deterrents for new market entrants. This creates a favorable landscape for established private entities with the financial capacity and experience to navigate these challenges. As a result, the private sector is well-positioned to leverage its resources and expertise to undertake and manage complex infrastructure projects, further fueling investment interest in the sector. This financial viability, coupled with the previously mentioned factors, reinforces the private sector's commitment to contributing significantly to the development and maintenance of critical infrastructure assets.
Looking ahead, the private infrastructure investment sector is poised for continued growth. Projections indicate that the market will see an increase in investments following an increase of 23% in 2022, reflecting a sustained appetite for infrastructure projects and opportunities despite economic headwinds. Leading the charge is the investment in low-middle income countries' transportation, energy, and telecommunications. It is standard for the government in these countries to enforce financial constraints, which presents the opportunity for private investment. This strategic alliance between private investors and the government bridges the infrastructure gap by leveraging collaborative efforts. By monitoring economic growth, job creation, and sustainable practices, the initiative positions private investment as a catalyst for impactful, community-driven progress in regions where government allocations fall short.
Furthermore, the advancement of technology will spark the interest of private infrastructure investment as the improvement of digital infrastructure ramps up interconnectivity of global markets. Liberum suggests the demand for improvement will force over $600 billion to be invested into digital infrastructure by 2035, which is more than double the current investment. With such promise, it is the assets such as data centers that lead the way, as they offer a slightly higher yield than other infrastructure, but also “steady, utility-like cash flows” to investors. Data centers offer a great investment opportunity as the demand for data centers brings attention to the sustainability practices of these massive power instruments.
This leads to the last driver of future infrastructure investment, the pathway to clean infrastructure. This transition is expected to require a longer time period than other shifts. It is not a one time investment, but rather a multi-step process that builds towards a cleaner future. As governments strive to achieve emissions goals and ensure energy security, there is a notable surge in demand for investments directed at optimizing the energy supply chain.
In essence, private investment is a key driver to the success of many countries' infrastructure systems. Not only does it provide benefits to local populations, but it drives global economic prosperity. As for students interested in finance, it also will provide large amounts of high importance roles amongst capital markets and asset management and offer excellent career opportunities.
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