The five key themes to capitalise on in infrastructure

4d infrastructure infrastructure emerging markets technology

11 September 2023
| By Industry |
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As an asset class, infrastructure has a number of unique characteristics that makes it an attractive option for investors across all points of the economic or market cycle.

However, what is really compelling are the global growth thematics supporting the investment case.

There are five key and integrated growth thematics supporting the infrastructure asset class that are long term, significant and completely immune to short term economic events.

They are:

  • Developed market replacement spend
  • Population growth
  • The emergence of the middle class
  • The energy transition
  • The rise of technology.

Developed market replacement spend

Replacement spend relates to infrastructure that is already in place, but is aging and in need of upgrade. For example, a recent report suggested that one in five New Yorkers are drinking water from lead pipes, despite such pipes having been banned 60 years ago.

And the United States is not alone - over 50% of London water mains are over 100 years old and UK water companies are front page of the newspapers at present due to sewage leakages and ongoing pollution issues which is at least partly due to the age of the infrastructure.

Following decades of under-investment by developed countries in infrastructure, our infrastructure is old and inefficient and a failure to upgrade it could have significant social and economic consequences (health, safety, efficiency). Privately financed infrastructure will fill a big part of that void, creating opportunity in both the listed and unlisted infrastructure markets.

Population growth

The second driver of the need for infrastructure investment is population growth but with changing demographics. The United Nations estimates that the world’s population will reach 8.5 billion by 2030 with much of this population growth coming from emerging markets.

In many emerging economies, populations are getting younger while in more developed economies, populations are aging. In both instances the right infrastructure investments are needed to support these demographic shifts.
In emerging markets, the growth of a young population is driving the need for new, improved and expanded infrastructure development, as demographic trends are very supportive of economic evolution and infrastructure investment.

In the developed world, the growing aging population also presents opportunity for infrastructure investment through the increased demand on government budgets in terms of pensions and wealth, shifting the reliance to the private sector to finance infrastructure development.

The emergence of the middle class

The third trend is the emergence of the middle class in developing economies. Emerging markets make up around 85 per cent of the global population. Given the potential size of the middle class in emerging economies, changes in spending and consumption patterns will have significant implications for global business opportunities and investment for decades to come.

As an individual’s wealth improves, spending patterns change. It starts with a desire for three meals a day and access to basic essential services such as clean water, indoor plumbing, gas for cooking and heating, and power. In order to provide access to these services, adequate infrastructure must first be in place.

Once you have access to essential services the need for more infrastructure steadily grows – for example with power comes the desire for white goods – such as a fridge or television – which increases the need for port capacity and logistics chains as well as per capita usage of essential utility services. 

Over time the demands of this growing middle class progresses to services that support efficiency and a better quality of life, such as a scooter or car to be able to travel, increasing the demand for quality roads and airports, or data usage, increasing demand for communication infrastructure. Infrastructure is both a real driver in the emergence of the middle class as well as a key beneficiary.

The energy transition

The fourth key thematic underpinning the infrastructure growth story is the decarbonisation opportunity. While the speed of ultimate decarbonisation remains unclear, there appears to be a real opportunity for multi-decade investment in infrastructure as every country moves towards a cleaner environment and a more sustainable future.

Energy transition and decarbonisation of the power sector is an obvious thematic and will have the greatest impact on countries looking for Net Zero. However, other forms of infrastructure, namely
transportation, also have a key role to play.

The recent energy crisis across Europe has also highlighted that this transition must be managed in a socially responsible way with security of supply a priority. This realisation has fast tracked the build of new renewables sources, increased investment in grids to enable its distribution to end users and reaffirmed transition fuels importance, such as gas, in the shift.

This is not just a developed market issue. While emissions in the developed world are gradually falling, emerging markets have seen their share grow and this is set to continue as their economies evolve - EMs are expected to account for 85% of the projected global increase in electricity demand to 2050.

Decarbonisation must happen, and the goal of net zero is not achievable without the right forms of infrastructure investment in the developed and emerging worlds.

The rise of technology

We have recently added a fifth theme to the infrastructure growth dynamic and that is the rise of technology and all the associated nuances of its use and impacts on infrastructure needs.

The explosive growth in data consumption will fuel significant investment opportunities for digital infrastructure owners globally. Cellular towers will play a key role in building out wireless networks, as they house electronic communications equipment and antennaes which provide surrounding areas the ability to communicate wirelessly.

However, we also benefit through the growing importance of technology in enhancing efficiency and therefore profitability of all infrastructure operations, whether that be transport or energy. This is a phenomenon being adopted across the infrastructure space – automatic tolling, smart metering, driverless vehicles as an example.

When you combine all these factors, the need for global infrastructure investment over the coming decades is clear. With governments unable to wholly fund the infrastructure need, there is significant opportunity for private investors to tap into this growth story. We can think of no more compelling or enduring global investment thematic for the coming 50 years.

Sarah Shaw is chief investment officer at 4D Infrastructure

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