When global asset manager BlackRock announced it was buying infrastructure fund manager Global Infrastructure Partners for $12.5 billion earlier this month, the news did not come as much of a shock. BlackRock executives had been on the lookout for acquisitions in “growth sectors,” and asset managers currently point to infrastructure as an attractive place for investors to put their money amid an uncertain market. It tends to be less sensitive to high interest rates than other asset classes, and since much of it provides necessary services, it can be less volatile of an asset overall.
There are also opportunities to capitalize on growth areas of infrastructure right now, including the transition to energy renewables and the increasing need for data transfer and storage.
But many financial advisors are just starting to take a closer look at infrastructure as an asset class.
“We believe infrastructure funds offer stable and steady cash flows with some diversification, but our efforts to date have largely been focused on other portions of the alts universe,” noted Nick Zamparelli, senior vice president and chief investment officer with Sequoia Financial Group, in an email. “Infrastructure is an area of the alts spectrum we are looking to get more exposure to over time.”
Previously, other alternative investment options offered better risk-adjusted returns, while protection from inflation wasn’t as much of an issue, Zamparelli noted. Today, the opportunities in infrastructure look more similar to those offered by real estate and private equity, he added.
Gary Quinzel, vice president, portfolio consulting, with Plymouth, Minn.-based RIA firm Wealth Enhancement Group, said the firm’s advisors recommend some exposure to infrastructure when discussing allocations to real assets. But those allocations tend to be lower than to other alternatives, partly because infrastructure can be more easily impacted by external events like energy prices, he noted. WEG recommends around 10% of a client's alternative allocation go toward real assets and infrastructure.
"It’s a different level of diversification, but it’s very worthwhile to consider as part of a diversified portfolio,” Quinzel said. “We tend to approach it at times within our private bucket, but we approach it in our liquid bucket as well.”
In general, most WEG clients with under $2 million in assets have no allocation or under 5% to alternatives; clients in the $2 to $5 million range may be closer to 5%-10% in alternatives, and clients with more than $10 million may have 10%-20% in alternatives.
At the moment, the wealth management community might lack the comfort level with infrastructure investments it has developed with private credit and real estate over the past decade, according to Gregg Sommer, partner and U.S. financial intermediaries leader with Mercer Investments. Once they get more education about the sector, they will likely get more comfortable allocating to it, he said. “From a macro-economic perspective, there are a lot of infrastructure needs in America and across the globe,” he said. “If you have a macro pool that’s growing, and then simultaneously, education into an asset class, that creates a nice match.”
What You Get With Infrastructure Investments
Among infrastructure’s main attraction points is that it often comes with high barriers to entry and long-term contracts for providing essential services. That translates into stable, predictable cash flows and protection from inflation and interest rate volatility, noted Chloe Berry, managing director in the infrastructure group with alternative asset manager Brookfield and head of Brookfield Infrastructure Income Strategy, a fund launched in 2023 for the private wealth channel. Infrastructure also tends to have high operating margins and large-scale capital needs.
Given the uncertainty investors had to deal with over the past several years, “we find them looking for that ‘sleep at night’ asset class that provides low volatility and protection and resiliency from what is an uncertain world out there,” she said. “And that is why investors are really excited about infrastructure right now.”
In the 10 months after Brookfield Oaktree Wealth Solutions launched Brookfield Infrastructure Income Fund, it raised $1.3 billion, Berry noted. It’s a continuously offered, unlisted, closed-end fund that first became available to individual investors in Europe and Asia Pacific and later to those in the U.S.
According to London-based research firm Preqin, which regularly surveys institutional investors, over 70% of them have been investing in infrastructure for diversification purposes. Approximately 45% invest in the asset class as an inflation hedge and for a reliable income stream. Forty percent prefer it because of its low correlation with other asset classes. Return considerations tended to rank last.
However, speaking at BlackRock’s fourth quarter earnings call on Jan. 12, Chairman and CEO Larry Fink said infrastructure will be one of the fastest growing sectors of private markets for years to come. Among the trends driving this growth, Fink listed increasing global demand for digital infrastructure, the need to upgrade logistical hubs and reconfigure existing supply chains and moves toward decarbonization and energy independence.
“Having a long duration, high coupon, inflation-protected asset is a very strong asset class for all the retirement funds, but importantly… wealth,” he said. “We believe [it’s] a great opportunity to provide to the wealth management market these types of products, so they can enjoy these type of long duration assets.”
According to Bayo Ogunlesi, founder and CEO of Global Infrastructure Partners, the infrastructure fund manager, who also spoke during the earnings call, of 19 infrastructure companies in GIP’s flagship funds, 12 reported double-digit EBITDA growth in 2023.
“We believe of all the institutional caliber assets that you can add to your portfolio, private infrastructure is the least correlated with the portfolios that most individual investors already have,” said Bob Long, partner and CEO with investment firm StepStone Private Wealth. “In a world that’s experienced a tremendous amount of dislocation and uncertainty over the last handful of years, it’s not surprising that the most sophisticated individual investors and their financial advisors are showing keen interest in infrastructure at this juncture.”
Last August, StepStone Private Wealth launched StepStone Private Infrastructure Fund (STRUCTURE), an evergreen interval fund that focuses on the power, data and transportation sectors. Between 40% and 80% of the vehicle is dedicated to secondary investments, 20% to 50% to co-investments and the rest to primary investments. According to Long, in the first four months since the fund was launched, 30 U.S.-based wealth management firms allocated their clients’ money to it.
From its launch through year-end 2023, STRUCTURE delivered a return on Class I shares of 16%, compared to a return of 6.89% for S&P Global Infrastructure for the same period. Long noted, however, that figure was above long-term target and may not be representative.
Cantor Fitzgerald Infrastructure Fund, another continuously offered, closed-end interval fund, has delivered a cumulative return of 8.99% from inception to year-end 2023 and annualized returns of 5.89%. The fund invests in electric utilities, independent power facilities, water utilities and digital infrastructure, among other things.
According to data from investment manager Maple-Brown Abbott, in the decade between December 2012 and December 2022, private infrastructure assets delivered returns of 11.4%. Listed infrastructure assets delivered returns of 9.5%.
“Infrastructure tends to perform in a narrower band of returns,” said Berry. “Although we are seeing some really exciting opportunities arise [because] buyers have less access to capital right now. When buyers are looking to buy infrastructure assets, there are potentially less buyers out there and their ability to finance their acquisitions is harder right now. With that backdrop, we believe that for buyers like Brookfield that have access to capital there will be opportunities to buy at higher returns than we have seen for some time.”
The same applies to lending on private infrastructure, she added.
New Funds Proliferate
Last year, fundraising for private infrastructure investment felt some of the same tailwinds as real estate and private equity—the denominator effect, difficulty of accurately valuing assets in an environment with a slower deal flow and the popularity of private credit funds, which could offer the same returns without the equity risk, according to Preqin. In 2023, there were 79 funds raised targeting unlisted infrastructure, totaling $47.4 billion, compared to 156 funds totaling $176 billion in 2022.
However, that trend is expected to reverse in 2024.
“Last year was a slow year—all private asset classes took a bit of a pause, and a lot of that was rebalancing because of uncertainty in the listed markets,” said Stephen Dowd, chief investment officer, private infrastructure strategies, with real assets investment manager CBRE Investment Management. “Now that traded markets have rebounded, they are healthy, you are going to see them getting back on track. We expect this year infrastructure will continue that steady performance that we’ve seen through multiple cycles.”
At the same time, there is a growing number of interval funds and other structures through which wealth managers can provide their clients with access to private infrastructure investment opportunities, Dowd noted.
For example, last March, private equity giant KKR closed KKR Global Infrastructure Investors IV, a $17 billion fund that was open to private wealth platforms, family offices and high-net-worth investors, in addition to institutional players and sovereign wealth funds. The fund’s focus is on critical infrastructure predominantly in OCED countries. Just last week, the fund agreed to acquire 1,100 wireless communication towers in Latin America.
However, because of massive changes within some segments of infrastructure over the past decade, investors and advisors need to be more careful about the risk/return dynamics when it comes to infrastructure assets, warned a 2022 report from consulting firm McKinsey. For example, some energy-related assets that had historically been viewed as “super core” might be riskier today as they are phased out by renewables. At the same time, some emerging segments of infrastructure might require outsized capital commitments to deliver targeted returns and come with periods of negative cash flow, the report noted.
McKinsey found that between 2009 and 2021, average target IRRs on infrastructure investments declined by 4% to 5% a year.
In acknowledgement of the rapid evolution of the infrastructure market, Brookfield expects to see the highest returns from a focus on the three “Ds,” according to Berry—deglobalization, decarbonization and digitalization. Deglobalization encompasses investment in reconfigured supply chains, as many critical industries are on-shoring their manufacturing facilities after the disruption they experienced during the pandemic. Decarbonization includes renewable power generation facilities, as well as nuclear power, battery storage, EV charging stations and an amalgamation of other things that should help reduce carbon emissions. “It’s really broad and requires an immense amount of capital,” Berry said. Digitalization also encompasses a wide universe of physical assets, spanning from telecom towers to fiber optic networks.
As of year-end 2023, Brookfield Infrastructure Income Fund held 21 assets valued at about $1.6 billion, most of them focused on private infrastructure. Almost half of its capital (41.7%) was invested in renewable power and transition, another 24.5% in utilities, 13.5% in transportation and the rest was almost evenly divided between midstream energy and data.
Similarly, CBRE Investment Management feels there are strong secular trends supporting growth in digital infrastructure and energy transition, according to Dowd. “There is a lot of infrastructure in those two categories,” he noted. “You can find data centers, fiber networks, local phone towers in digital infrastructure. It’s a similar kind of thing in energy transition. There is a movement toward solar, wind and other types of renewables because they are now competitive or less expensive than other types of energy. It’s a massive secular trend that we think is going to be there for a decade or decades.”
For StepStone and its STRUCTURE fund, which is largely focused on investing in infrastructure through the secondaries market, the way to limit risk is tied to diversification—across strategy, vintage year, geography and manager, Long noted.
“We strongly feel that diversification is important to receive the best risk-adjusted returns on infrastructure,” he said. That’s not a challenge when it comes to large institutional investors. But for individual investors, “particularly for a more niche strategy like infrastructure compared to, say, private equity, it would be difficult for those investors to achieve manager diversification by making a series of commitments to proprietary funds.”
As of year-end 2023, STRUCTURE had $52.3 million in assets under management. It has focused on core-plus and value-add investments.
Long also pointed to opportunities to buy performing infrastructure assets at discounts to fair value through secondary markets and achieve above trend returns that way. He acknowledged discounts on infrastructure secondaries tend not to be as high as the ones on private equity offerings. But over the last several quarters, STRUCTURE has been able to take advantage of discounts that ranged from the high single digits to low double digits, he said.
“History has shown the strongest vintages for private assets typically follow periods of dislocation and uncertainty,” Long noted. “We believe the near term is a very attractive entry point for the infrastructure asset class.”