That transaction market for infrastructure assets has slowed somewhat since interest rate hikes began in 2022. However, Burnett notes that most major institutional players are continuing to scale up their infrastructure exposures and have picked up somewhat so far in 2024 from their lows at the second half of 2023.
The roughly $1 trillion (USD) transaction market is roughly 50 per cent in North America, with another 30 per cent of assets in developed Europe. Around 15 to 20 per cent of the market is assets in the rest of the world. North America and Western Europe, Burnett says, continue to dominate the transaction market despite some interest from select institutions in Asia.
Burnett sees the mid-market area as so attractive largely thanks to valuations. He sees small to mid-market assets as anywhere from three to four times cheaper on an multiple basis to what he sees in the large-cap space. He notes that this segment also tends to contain some of the more growth-oriented plays in the infrastructure market today. Those include data storage, telecoms, and renewable energy infrastructure. That growth orientation, and exposure to narrative mega-trends like the rise of AI, has allowed those assets to grow despite higher interest rates.
Despite their apparent solidity and stability, Burnett says that the larger-cap assets in infrastructure often tend to be the most interest rate sensitive. That’s because most of these assets are fully stabilized and have long-dated cashflow streams. That predictability makes them a strong core asset, but also leaves them vulnerable to short-term cost fluctuations due to factors like interest rate increases.
While the growth in AI-related assets like data, telecom, and renewable energy has been remarkable, Brunett notes that their valuations have risen somewhat above their normal levels. He sees some risk of overvaluation in these assets right now and notes that some contrasting assets could be more attractive. Those include traditional energy assets such as pipelines.