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. And as new governments are finding their feet worldwide, many incoming administrations have come to power on platforms that include big infrastructure spending commitments.
This may be because most countries, apart from a handful of notable exceptions, 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 the deployment of capital into the energy transition—the electrification of public transport and power networks. This will also include critical upgrades to hospitals, roads, and water utilities – an investment we expect to materialize soon and for infrastructure development to accelerate over the next few years.
Role of government
Infrastructure spending worldwide is forecast to grow to over US$9 trillion in 2025. This sum is too large for the private sector or governments to raise alone. Therefore, governments and elected officials should create the right environment and planning structure and seek to help crowd in private investment to drive growth.
Domestically, recent examples include the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and CHIPS and Science Act.1,2,3 Internationally, China’s Global Development Initiative, and Le plan de relance in France provide substantial funding and incentives for infrastructure projects.4,5
These policies aim to modernize their nation's infrastructure, promote energy security, and support the transition to a net-zero emissions future. Such government support reduces investment risks and enhances the attractiveness of infrastructure as an asset class.
Role of investor
If the future of infrastructure investment lies in these public-private partnerships, where might private money come from, and what are these investors looking for?
Each of these sources of private finance – pensions, insurers, and retail investors – is very different as infrastructure investments must satisfy diverse requirements.
Pensions
Pension funds control vast 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.
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.6 Two years earlier, the average insurer's allocation to infrastructure was only 1.5%, significantly lagging other institutional investors.7 The following year, this had increased to 2.5%.5 By 2024, 60% of insurers identified clean energy infrastructure as a primary thematic focus.8
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, offering long-term investments to support socially essential products such as life insurance and annuities. This trend extends beyond debt. Some 33% of life insurers and 26% of property and casualty insurers have indicated plans to increase their allocations to infrastructure equity over the next two years.6
Furthermore, regulatory regimes have incentivized infrastructure debt and equity insurance investments. Regulatory frameworks implemented in Europe and adopted in various Asian countries 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 (Table 1).
Table 1. Types of infrastructure
Investing in global infrastructure offers smaller investors the chance to invest in physical assets that support artificial intelligence (AI) growth while contributing to economic development, urban modernization, and climate change mitigation (Chart 1).
Source: abrdn, December 2023. Note: The above is provided for illustrative purposes only, and is not indicative of any abrdn product or service.
The rationale for infrastructure investing
Several key traits define infrastructure assets. They typically require significant capital investment, are often linked to specific geographic locations, and are challenging to replicate. These assets generate revenue through long-term contracts or regulatory frameworks that adjust with inflation and tend to have low maintenance costs.
Because of these characteristics, infrastructure assets can withstand market fluctuations, potentially providing stable returns, attractive income, and long-term growth. Additionally, they have demonstrated low correlations with traditional investments, offering benefits for portfolio diversification.
What are the tailwinds driving opportunities within infrastructure?
We believe this immense investment opportunity is buoyed by strong, generational tailwinds, which include:
- DigitalizationDigitalization revolves around data. The amount of data generated globally roughly doubles every 18 months. This vast increase in data necessitates efficient transportation, processing, and storage, which in turn requires substantial investment in modernizing our digital infrastructure. The significant energy consumption associated with artificial intelligence (AI), data centers, machine learning, and hyperscale computing intensifies this demand. Key upgrades include replacing copper cables with fiber optics in communication networks to achieve faster speeds and greater bandwidth, building more cell towers to support 5G connectivity, and constructing additional data centers to accommodate the growing volume of data and support AI development. These enhancements are crucial to meet the rising power demands in the US and worldwide.
- DecarbonizationDecarbonization begins with renewable power generation and involves connecting that power to the grid using transmission assets. It also promotes smart, eco-friendly innovations for homes.
- DeglobalizationCompanies are working to shorten and improve global supply chains by automating ports and moving the production of critical goods closer to their primary markets. At the same time, governments worldwide, as mentioned earlier, are prioritizing energy security to ensure a steady and reliable supply.
This surge in power demand marks a notable shift, especially following several decades of low power growth in the US and a decline in power growth across Europe. Due to these factors, we are now seeing an inflection point, making it a critical tailwind for infrastructure.
The convergence of digitalization, decarbonization, and deglobalization presents a unique and attractive opportunity to invest in infrastructure. These significant trends are driving strong demand for updated digital networks, renewable energy solutions, and resilient supply chains. Private investors play a crucial role in addressing these needs and have the chance to participate in transformative projects that promise solid returns and contribute to a more sustainable and connected world.
Final thoughts
As our world continues to evolve, the demand for infrastructure will increase, and private capital will play a crucial role in its development. We expect that investors with diverse goals and varying risk tolerances will be drawn to this asset class in the coming years. These investors will create demand for a wide range of investments, from low-risk infrastructure debt to higher-risk, higher-return listed infrastructure equity. By streamlining the planning process, we can potentially accelerate infrastructure development, reduce risks, and ultimately achieve higher returns for investors. Finally, making access to these investments easier and pricing them appropriately will further enhance demand for an asset that can improve everyone’s quality of life. For these reasons, we believe this represents an attractive opportunity worth exploring.
Interested in learning more? Join us for our upcoming webinar, “What opportunities are there in infrastructure in 2025?” when our authors will delve deeper into the world of infrastructure investing, explore the opportunities and challenges ahead in 2025, and share their insights and perspectives.
1 The Inflation Reduction Act of 2022 is a United States federal law that aims to reduce the federal government budget deficit, lower prescription drug prices, and invest in domestic energy production while promoting clean energy.
2 The Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Law (BIL), is a United States federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on November 15, 2021.
3 The CHIPS and Science Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 9, 2022.
4 The Global Development Initiative, officially the Global Development Initiative – building on 2030 SDGs for Stronger, Greener and Healthier Global Development – is a multilateral development initiative proposed by Chinese Communist Party general secretary Xi Jinping in 2021.
5 Le plan de relance, or the France Relance plan, refers to an initiative to accelerate the country's ecological, industrial and social transformations, proposes concrete measures for everyone: individuals, companies and associations, local authorities and administrations.
6 "Insurance Companies and Infrastructure Investments." Developing Insurance Markets. World Bank Group, June 2021. http://documents.worldbank.org/curated/en/731841632205077536/Insurance-Companies-and-Infrastructure-Investments.
7 "Solvency II Review and Long-Term Equity Investments: A New Era for Private Equity and Infrastructure Investments?" DWS Group, April 2024. https://www.dws.com/AssetDownload/Index?assetGuid=ad3a641b-a256-4d93-a119-0606c1297050&consumer=E-Library.
8 "Resilience through change." 2024 Global Insurance Report. BlackRock, October 2024. https://www.blackrock.com/ch/professionals/en/literature/market-commentary/2024-global-insurance-report.pdf.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Diversification does not ensure a profit or protect against a loss in a declining market.
Products investing in infrastructure are subject to the risk of concentrating investments in infrastructure-related companies, which makes them more susceptible to factors adversely affecting issuers within that industry than would a product investing in a more diversified portfolio of securities. These risks include high interest costs in connection with capital construction programs and the costs associated with environmental and other regulations.
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