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Analysen 08.01.2024

The opportunity set in the infrastructure transition

The opportunity set in the infrastructure transition

The sort of infrastructure that traditionally springs to mind might include bridges, roads, airports, rail and power. However, it can be argued in many cases that the infrastructure built over the last few decades is no longer fit for the future needs of society, given the heightened geopolitical risk, changing demographics, and environmental considerations.


This is where private capital can underpin the transition to new infrastructure through investment in the next wave of assets, including renewable energy, new mobility, decarbonisation assets, green logistics, waste facilities and digitalisation, all of which can improve many aspects of modern life.

The global movement towards decarbonising economies to prevent climate change and making them more circular to preserve nature and ecosystems is a key driver in the major digitalisation trend. The race to reduce our consumption of fossil fuelshas opened up a massive process of developing new technologies for powering our industry, transportation, homes and activities. As changing work patterns, business processes, global supply chains and customer demand becomes more technology-driven, the need for digitalisation and better connectivity (in telecommunications, transport and urban living) has skyrocketed. With it the need for digital infrastructure has also grown, which will call for plenty of capital, and carefully sourced and controlled use of energy supplies.

Digitalisation will be a key part of the evolution of society and so digital infrastructure will be required to meet this global trend.

The question then arises how the digital transition can help with sustainability issues, such as climate change, decarbonisation and beneficial societal change. Infrastructure has an inherent link to sustainability by providing basic essential services to society, such as power, heat, water and sanitation services. Digital infrastructure is no different; not only does it support all of the aforementioned services, it can actively improve them, and therefore the lives of the people using them. It can also reduce overall consumption and pollution by making processes more efficient, or in some cases, replacing physical processes altogether. Digital technologies such as 5G, the Internet of Things and artificial intelligence will accelerate the effects of environmental improvements.

The next generation of digital infrastructure has the power to significantly reduce the use of resources.

The digital transition will not be without challenges. Firstly, in order to ward off cybersecurity risks, it is essential that highly sophisticated security measures are implemented to protect sensitive data. Another consideration is that of the regulatory frameworks governing data and connectivity. Government spending and strong regulations support the digital transition while also offering some cybersecurity protection. Also, the need to upgrade and expand infrastructure comes with added resource usage, extensive capex and challenges linked to innovation, but the likely rewards from such investment far outweigh the costs to economies and to societies of leaving infrastructure to become obsolete.

While the increasing interest rates and inflation have made asset allocation tough lately, the resilient nature of the infrastructure asset class means investors can incorporate it as a stabilising force into a diversified portfolio. Digital infrastructure assets encompass the key characteristics of traditional infrastructure assets: essential services, high barriers to entry, resilience and a long-term horizon, elements of regulation, stable and long-term cash-flows (through long-term contracts and/or sticky customers) with price escalators and low correlation, thus offering some downside protection. In addition, they benefit from secular growth trends driving demand as well as the potential for positive ESG implications that create added value.

The infrastructure transition provides investors with many opportunities to gain attractive returns with a much more conservative level of risk. Additionally, the scope of the opportunity set has expanded significantly, offering investors many more strategies, sectors and regions to choose from, over much shorter time spans and with higher value-creation potential.

Investors with capital and the ability to source expertise for partnerships are therefore in a strong position to capitalise on the massive digital infrastructure boom ahead.

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Kayte Hodgson
Senior Investment Specialist

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Charlotte Dewynter
Head of Infrastructure

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Expertise

Globale Aktien

In Unternehmen mit nachhaltig besserer Mehrwertschöpfung investieren.


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