The global economy is on the cusp of an “infrastructure revolution”, if Larry Fink is to be believed. The boss of BlackRock, the world’s largest asset manager, made the modest prediction shortly after announcing on January 12th that his firm would acquire Global Infrastructure Partners (GIP) for $12.5bn. That company, led by Adebayo Ogunlesi, an old pal of Mr Fink’s from their banking days, is the world’s third-largest infrastructure investor, behind Australia’s Macquarie and Canada’s Brookfield. Its assets range from Gatwick Airport in London to the Port of Melbourne. Mr Ogunlesi and his fellow partners will collectively become BlackRock’s second-largest shareholder.
Mr Fink is not the only one excited about the industry. On January 16th General Atlantic, a private-equity (PE) firm, confirmed reports that it would buy Actis, an infrastructure investor focused on emerging markets. In September CVC, another PE firm, announced it was buying DIF, a Dutch infrastructure investor. Over the past decade assets under management in infrastructure funds have increased almost five-fold, to $1.3trn, according to Preqin, a data provider. Pension funds and sovereign-wealth managers have been lured in by the industry’s returns, which are both handsome and relatively stable. More than half of such backers surveyed by Preqin intend to increase the share of their portfolios allocated to infrastructure. Some of the larger among them now invest directly in these dull assets. Why, then, all the excitement?
The infrastructure-investment business took shape in the 1990s and 2000s. Western governments with growing debts began seeking out private investors to acquire—and help rejuvenate—ageing infrastructure from airports and railways to water pipes. Later, a growing assortment of companies from energy suppliers to telecoms operators also turned to infrastructure investors to offload assets such as pipelines and cell towers, observes Sam Pollock, boss of Brookfield’s infrastructure business.
Now demand for infrastructure investment is soaring thanks to three megatrends, explains Mr Pollock. The first is decarbonisation. For the world to meet its climate goals, some $8trn will need to be invested over the remainder of this decade in renewable energy such as solar and wind, as well as batteries to store it and transmission lines to transport it. Hefty investments will also be needed in hydrogen facilities, to produce carbon-free fuel for planes and ships, and in carbon removal. The second megatrend is digitisation. Software may well be eating the world, as a venture capitalist once predicted, but it is relying on an awful lot of physical assets to do it, from fibre-optic cables and 5G networks to data centres. Third, deglobalisation. Efforts to shift supply chains away from China are spurring demand for capital-hungry factories and new transport infrastructure to move goods over land and sea. In Europe concerns about energy security following Russia’s invasion of Ukraine have also provoked a rush to build liquefied-natural-gas terminals to bring in the fuel from less belligerent places.
All that demand for investment is arriving at a time when government and corporate balance-sheets are under strain. America’s $26trn (98% of GDP) pile of federal-government debt is expected to continue expanding over the coming decade. Many governments in Europe also have weighty debt burdens. Higher interest rates are making those liabilities more expensive to service. They are also making life awkward for companies which have gorged on cheap debt to juice shareholder returns. The need to deleverage will limit their ability to make big investments in the years ahead. Infrastructure investors are ready and willing to fill the gap. In 2022 Intel, a big chipmaker, turned to Brookfield to fund 49% of a new $30bn chip factory in America.
So far most infrastructure investors have concentrated on rich countries, where governments are more dependable and currencies more stable. More than four-fifths of assets under management in the industry are allocated to Western markets, according to data from Preqin. At the same time, the need for new infrastructure is most pronounced in the global south, where both populations and economies are growing faster. “Emerging-market investment is a big opportunity for us,” says Raj Rao, one of GIP’s co-founders. Leigh Harrison, who leads infrastructure investing at Macquarie, notes that his firm is increasing the share of its funds it allocates to such markets.
The industry, then, looks set to become increasingly important to the global economy. Yet it is not without its detractors. In Britain Macquarie has been criticised for its stewardship of Thames Water, which manages the water supply of London and its surrounds. During its ownership of the utility from 2006 to 2017, Macquarie tripled the company’s debts, to £11bn ($14bn), helping to deliver a hefty return for itself and fellow shareholders. Since then the utility, weighed down by those debts, has struggled to afford necessary investments in fixing leaky pipes and reducing the sewage it pumps into rivers. Mr Harrison counters that £1bn a year was invested in the company during Macquarie’s tenure as its owner, more than in any previous period. Still, he concedes that “markets were very different” when it bought the business, and that his firm no longer loads its assets with debt to the same extent.
From spreadsheets to hard hats
In a world of pricier debt, the way infrastructure investors make money is shifting from financial engineering to cleverer management of assets. Mr Harrison notes that Macquarie is bulking up the number of industry experts in its team. “Where we really add value is when we bring greater operational rigour to an asset,” says Mr Rao of GIP. He offers the example of Gatwick, where GIP has focused on speeding up security screening, leaving travellers with more time to relax—and indulge in some pre-flight shopping. For the infrastructure firms, merely shopping around for assets is increasingly an indulgence, too.
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