Private infrastructure: The New Constant In Portfolios

Reto Stohler, which structural trends make infrastructure relevant today?

Long-term trends such as the energy transition, digitalization, urbanization and new forms of mobility are driving a significant demand for capital across the infrastructure sector. Examples include investments in solar and wind farms, data centers and transport infrastructure such as electric vehicle charging networks. These developments are structural rather than cyclical. They create broad, long-term investment opportunities, ranging from defensive core infrastructure assets to more growth-oriented platforms.

Why is private infrastructure becoming increasingly important in portfolio construction?

Private infrastructure is evolving into a core asset class because it can meet several investor needs at the same time: access to structural growth, diversification and, depending on the segment, resilient cash flows.

This is important in an environment of higher interest rates and volatile markets. Many clients are looking for long-term return drivers with a low correlation to listed equities and fixed income. Private infrastructure can be an attractive addition to portfolios in this context. The asset class is much broader today than many investors assume. It is no longer limited to individual regulated infrastructure projects.

Clients have a strong interest right now in liquidity and flexibility. Private markets investments are often illiquid. Is private infrastructure different?

No, private infrastructure is fundamentally an illiquid asset class. However, it differs from other private markets investments because of its breadth and the variety of return profiles it offers.

Part of the investment universe is underpinned by regulated or contractually secured revenues, for example from power grids, toll roads or digital infrastructure assets. Other investments have a stronger focus on growth and operational development.

Unlike private equity, many infrastructure investments can generate regular distributions relatively early in the holding period. Nevertheless, as with private equity, value creation in private infrastructure depends to a significant extent on operational execution and, ultimately, on the exit. The asset class therefore remains illiquid, but depending on the segment, it can combine ongoing cash flows with long-term growth potential.

How should private infrastructure be positioned within the risk-return spectrum?

Private infrastructure spans a broad spectrum. More defensive core strategies tend to resemble income-oriented investments, while value-add strategies share many characteristics with private equity and public equities.

The key differentiating factors are the sector, the business model and the implementation strategy. And this breadth is what makes the asset class attractive. But it’s important to note that regulatory requirements mean the asset class is generally limited to qualified investors.

What can you tell us about cash flows and inflation in this asset class?

Cash flows remain a key feature of private infrastructure. However, their quality and stability vary across segments. Many infrastructure businesses benefit from regulated revenues or long-term contracts. In some cases, they have mechanisms that allow inflation to be passed through. Examples include indexed toll revenues, regulated electricity tariffs and lease agreements with major data centers that contain price adjustment clauses.

As a result, the revenue base of many infrastructure investments can be relatively resilient. In some cases, revenues can adjust to changes in the general price level. Historically, many infrastructure investments have proven resilient during periods of higher inflation.

Which risks should investors keep in mind when investing in private infrastructure?

Like all asset classes, private infrastructure involves risks, despite its many attractive characteristics. Investors should be aware that many infrastructure companies operate in regulated markets and are therefore exposed to regulatory and political risk.

Operational risks exist, for example in expansion projects, platform integrations, technological change or shifts in demand within specific sectors. In growth-focused strategies, management quality, capital structure, valuation and the exit environment play an important role.

Careful manager selection, diversification and a clear understanding of the relevant operating environment are therefore essential.

In one sentence: What makes private infrastructure attractive for investors today?

Private infrastructure combines exposure to global megatrends with a broad range of value creation profiles, making it an attractive complement to well-diversified portfolios.