My ‘concrete professor’ was always keen to remind me when I was a fresh-faced civil engineering undergraduate nearly three decades ago that infrastructure investment is critical to improving everyone’s quality of life.
That’s why, as we look ahead to a new year, I’d like to revisit this important, yet often overlooked, asset class once again to review developments over a shorter timeframe.
While I’d love to talk about the grand narratives that will shape world history, it’s equally important to discuss the more prosaic things that also lead to change.
Whether it’s over the next 12 months, or the following two to three years, it’s often these developments – such as where the money will come from – that can provide a more tangible sense of what’s happening on, below and above the ground.
Why now?
This year people in more than 100 countries representing over half the world’s population went to the polls to vote in a national election.
As new governments are finding their feet around the world, many of the incoming administrations have come to power on platforms that include big infrastructure spending commitments.
That’s because, apart from a handful of notable exceptions, most countries have neglected their infrastructure. The climate crisis has, in large part, provided the catalyst to spur leaders into action.
Many are now seeking to turn a corner and accelerate deployment of capital into the energy transition – the electrification of public transport and power networks. That’s in addition to critical upgrades to hospitals, roads and water utilities.
We’re expecting this investment to materialise soon and for infrastructure development to accelerate over the next few years.
Role of government
Infrastructure spending worldwide is forecast to grow to more than US$9 trillion in 2025. This sum is too large for either the private sector or governments to raise alone.
The role of governments and elected officials is, therefore, to create the right environment and planning structure. Then seek to help ‘crowd in’ private investment to drive growth.
Recent examples include the US’s Inflation Reduction Act, China’s Global Development Initiative and Plan Relance in France.
Closer to home, a new UK government created this year the National Wealth Fund which is charged with achieving the triple goals of:
- Tackling climate change and driving regional and local economic growth.
- Generating a positive financial return to create an enduring institution.
- Mobilising private finance.
Types of private capital
If the future of infrastructure investment lies in these ‘public-private partnerships’, then what does this private money look like and what are these investors looking for?
There are broadly three categories of privately provided finance within this review: pensions; insurers and retail investors.
Each of these sources of private capital are very different and infrastructure investments need to satisfy diverse requirements.
Pensions
Pension funds control huge pools of money seeking longer-term returns. For example, some of the biggest in the world manage the equivalent of trillions of dollars in retirement savings for civil servants.
Pension funds can be divided further into three main types that vary by risk and investment horizon: open defined benefit (DB) schemes; closed corporate defined benefit (DB) schemes; and defined contribution (DC) workplace savings pools.
- Open DB pension schemes. These schemes continue to accrue long-term liabilities and often have implicit government support, such as local government pension schemes in the UK or employment retirement systems in the US. They can manage long-term risk and potentially enhance the environment where their members live and work.
- Closed corporate DB schemes. Historically, these schemes invested in infrastructure equity. However, their shorter time horizon and prospects – being bought out by an insurer or running down – conflict with the long-term nature of infrastructure commitments.
- Workplace DC savings pools. These are rapidly growing sources of institutional capital, with UK assets projected to exceed £1.1trillion by 2031. The current UK framework emphasises cost efficiency and a significant allocation to low-cost asset classes, particularly global equity, over higher-cost asset classes like infrastructure. That said, in Australia, superannuation funds have long-standing allocations to infrastructure and, in many cases, have established internal teams to enhance control and returns.
Insurers
The World Bank estimated in 2021 that if insurers allocated 5% of gross written premiums to infrastructure, it would cover nearly half of the annual investment gap.Two years earlier, the average insurer's allocation to infrastructure was only 1.5%, significantly lagging other institutional investors. The following year, this had increased to 2.5%. By 2024, 60% of insurers identified clean energy infrastructure as a primary thematic focus.
This focus is justified as infrastructure investments can provide stable, long-term, and sometimes even inflation-linked cash flows. These characteristics make infrastructure investments essential for asset-liability matching (ALM) – offering long-term investments to support socially essential products such as life insurance and annuities.
It’s a trend that extends beyond debt. Some 33% of life insurers and 26% of property and casualty (P&C) insurers have indicated plans to increase their allocations to infrastructure equity over the next two years.
Furthermore, regulatory regimes have incentivised insurance investments in both infrastructure debt and equity. Regulatory frameworks such as Solvency II and the International Capital Standard (ICS), which are being adopted in various countries across Asia, offer capital treatment benefits for qualifying infrastructure investments.
Wholesale
As equity markets, especially those with significant allocations to technology stocks, continue to perform well and sometimes appear fully valued, retail investors are exploring global infrastructure to diversify their risk.This sector aligns with the same themes and trends that are driving major technology stocks. For example, data centres are crucial for Nvidia, cell towers are essential for Apple and Tesla, and power generation and grid transformation are critical for Microsoft.
Investing in global infrastructure offers smaller investors the chance to invest in the physical assets that support artificial intelligence (AI) growth, while contributing to economic development, urban modernisation and climate change mitigation.
Infrastructure type vs investor group
- Debt
Project and corporate debt focused on concession and core assets, typically long-dated, and can be fixed rate, inflation-linking or floating
- Municipal Debt
Economic and social infrastructure debt providing public benefit. Typically, long dated, fixed rate, amortizing structures
- Concession
Social and economic brownfield and greenfield infrastructure projects (PPP/P3/PPP-Style)
- Core/Core+
European small to mid-market Core and Core+ infrastructure assets
- Value Add
Private equity-style investment in infrastructure themes, focused in North America
- Listed Equity
Holdings in publicly listed, global infrastructure companies
Source: abrdn, December 2023
Final thoughts
Our changing world needs more infrastructure, and private capital will play a critical role in helping to build it.
Expect to see more investors – representing varying capital, risk and return objectives – allocate more money into this asset class next year and beyond.
These objectives will influence demand for investments spanning lower-risk, lower-return infrastructure debt to higher-return, higher-risk, listed infrastructure equity.
Looking at the big picture, clearer and faster planning processes could reduce risk and improve returns for investors.
Meanwhile, improved access and a well-aligned pricing structure will also help support demand for an asset that promises to enhance everyone’s quality of life.