The attractions of infrastructure for many investors will push capital to the asset class, with AUM in private vehicles predicted to rise by 25% to $795bn in 2025
The attractions of infrastructure for many investors will push capital to the asset class, with AUM in private vehicles predicted to rise by 25% to $795bn in 2025
Facing the prospect of recessions unprecedented in scale, governments have delivered economic stimulus packages never before seen in their scope, size, and speed. While we can but hope that COVID-19 is a short-term challenge, these expansionary fiscal policies have long-term implications.
In the UK, public debt increased over 10% relative to GDP between March and July 2020, going above 100% of GDP for the first time since the early 1960s. US public debt passed the symbolic 100% mark in 2012 and climbed to 106% by the end of 2019, though is now expected to hit 120% by the end of 2020 and 125% a year later, according to Trading Economics. While fiscal sustainability ambitions have been dashed, longer-term constraints demand reassessments on how to finance and fund infrastructure investment programs.
There is increasing recognition of the role infrastructure investment plays as a driver of economic growth. Large-scale capital investments provide short-run demand stimulus, in part from the labor intensity of construction works¹, as well as longer-run supply-side benefits², reducing business costs and promoting trade domestically and internationally.
Private Capital Will Play its Part
Private capital has a crucial role to play in filtering projects that will increase supply-side productivity through bankable funding models. Preqin forecasts that unlisted infrastructure assets under management (AUM) will grow at a CAGR of 4.5% from $639bn in 2020 to $795bn in 2025 (Fig. 1).
Among investors surveyed by Preqin for Future of Alternatives 2025, 56% expect to increase their allocations to infrastructure in the next five years, with just 7% expecting to lower allocations. Pooled vehicles will account for the bulk of the increase, with 59% of investors intending to use this route more and 36% the same amount, followed by co-investment, which 48% of investors expect to do more of. Dry powder’s share of AUM has fallen from 42% in 2010 to 35% at the end of 2019, a testament to fund managers’ success at sourcing opportunities as the asset class has grown.
Many investors value the defensive characteristics of infrastructure. Contracted infrastructure assets have been an anchor in the storm in recent months, particularly when compared to other real assets such as real estate.
Superannuation schemes have held a long-term preference for infrastructure, with allocations staying above 5% for the past 10 years, reaching 6.3% in 2020, according to Preqin Pro. Public pension funds have increased their allocations to infrastructure, from an average of 2.1% in 2018 to 2.7% in 2020, in part reflecting a policy mandate to increase aggregate infrastructure investment. Private/corporate pension funds are holding steady on their allocations at 2.0% in 2020, though this will increase if their real estate and hedge fund allocations taper given recent sentiment (currently at 7.1% and 8.3% respectively). Banks have clearly signaled their recognition of the infrastructure asset class, with allocations holding steady at 2.0% in 2018, up from a mere 0.2% in 2015.
Infrastructure’s Investment Gap
The G20 Global Infrastructure Hub estimates an $18tn infrastructure investment gap out to 2040 to meet the Sustainable Development Goals (SDGs), against a projected spend of $79tn over the period (Fig. 2). Investment needs may increase far quicker if marginal gains in decarbonization become harder and more costly to achieve.
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