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23 May 2023
Private markets continue to feature as an ever-increasing portion of investment portfolios, given the diversification benefits that the asset class can offer when combined with traditional asset classes.
Unlisted infrastructure has historically proven to be a more defensive asset class than equities and may offer inflation protection, yield and exposure to structural mega trends.
Here we highlight some of the key potential benefits of incorporating unlisted infrastructure into a portfolio, and some key structural tailwinds that we believe underpin the future long-term growth of the asset class, including the energy transition, and position infrastructure as a significant investment opportunity into the future.
Attractive characteristics of unlisted infrastructure
Unlisted infrastructure has historically proven to be a more defensive asset class than equities, offering the potential for inflation protection, yield, and exposure to structural growth drivers. There are a number of potential benefits that can be achieved through incorporating unlisted infrastructure into a portfolio including:
An inflation hedge: Infrastructure can act as a hedge to inflation through contracts, regulation or market position.
Periods of high inflation have tended to be a tailwind for unlisted infrastructure returns and can be particularly beneficial for core and core plus infrastructure assets.
For many core and core plus infrastructure assets the link between returns and inflation is stronger than for those infrastructure assets higher up the risk spectrum.
Improved portfolio performance: As highlighted in Figure 1, through our analysis1 of the period from 2003-2021, we have found that adding a 20% allocation to unlisted infrastructure to a traditional portfolio of 60/40 equities/bonds and reducing each by 10% (i.e., a 20%/50%/30% unlisted infrastructure/equities/bonds split), improved annual portfolio performance compared to the 60/40 portfolio by 0.70% and lowered volatility. This 0.70% difference in annual portfolio returns can create some attractive portfolio benefits with the impact of compounding over time.
Figure 1: Impact of infrastructure allocation on a portfolio
A structural imbalance in the infrastructure market: There is also a structural imbalance of the demand vs the supply of infrastructure assets.
It is estimated that total energy infrastructure investment required to achieve to net zero by 2050 could be between $US92 trillion and $US173 trillion, or between $US3.2 trillion and $US6 trillion per year2.
However, with governments globally more indebted than ever, this means there is a need and opportunity for private capital to step in and fill the investment gap.
Next generation infrastructure: Demographics, decarbonisation, digitalisation
We believe that the growing demand for infrastructure is being driven by strong structural secular tailwinds or what we describe as structural megatrends. We think that this means that there is an enduring demand for private sector capital which presents some attractive investment opportunities across these key structural megatrends. Some of these include:
Demographics: The global population is expected to increase by 2bn to 9.7bn by 20503. In addition to this growth, our population is also ageing, with 2.1bn people expected to be aged 60 and older by 20504, up from 1bn in 2020. Our view is that this growth amounts to a significant investment opportunity and creates a need for capital investment in infrastructure.
It is expected that $US94tr5 will be needed in infrastructure investment over the period to 2040 for countries to match their best performing peers.
Decarbonisation: Infrastructure will continue to play a crucial role in helping countries to transition to net zero by 2050. The infrastructure sector is a large participant in the broader economy and therefore, for countries to achieve net zero by 2050 infrastructure operators will need to find ways to reduce carbon emissions within the sector.
This can be achieved through investing in core renewables such as off-shore and on-shore wind, PV solar, geothermal power, or through investing capital into our existing utility networks to enable the proliferation of renewable energy, to help achieve greater connectivity between the two.
Decarbonisation has an added tailwind of government policy support. As an example, in the US, the Inflation Reduction Act (IRA) will provide $US369 billion6 in capital towards the decarbonisation of power and transport, energy security, and climate change solutions over the next decade.
Along with the Infrastructure Investment and Jobs Act (IIJA) passed in 2021, the IRA is expected to unlock significant new opportunities in the US market. In particular, the spending is expected to increase the share of clean power generation to up to 80% of the energy mix by 2030, and to achieve a zero-carbon power sector by 20357.
Digitalisation: With the continued strong upward trajectory of data growth, digitalisation is another key structural mega trend globally, where we see continued long term investment opportunity.
Global internet traffic has grown by 1000% between 2002 and 20228, and we continue to see new applications requiring increased bandwidth and lower latency, creating demand for new and upgraded digital infrastructure.
We are seeing further network densification where technologies like 5G are requiring investment into fixed and mobile networks, to continue to improve bandwidth and latency.
Importantly for infrastructure investors we are seeing a resilience in the demand for data, with structural drivers behind this digitalisation proving resilient to the vagaries of economic cycles9.
Infrastructure opportunities here and now
We continue to see opportunities globally across the key thematics outlined above and across traditional sectors in which we tend to invest including energy and utilities, renewables, transport and other contracted infrastructure
Two investments where Macquarie Asset Management (MAM) has identified opportunity include:
- In December 2022, MAM managed funds acquired a significant minority stake in VIRTUS Data Centres from ST Telemedia. VIRTUS is a leading hyperscale data centre platform, with a portfolio of data centres across London, which is the largest data centre market in Europe, providing colocation and cloud connectivity services under long-term contracts. This acquisition demonstrates the high conviction MAM has in the digital space, which is underpinned by strong growth in data consumption and new use cases.
- ElectraNet is an essential infrastructure asset in the electricity market supply chain that transports electricity across South Australia. South Australia has established a goal of achieving 100% net renewables by 203011. This rapid energy transition is creating new challenges for the production, transmission, storage, and consumption of electricity. Accordingly, the Australian Energy Market Operator believes more transmission infrastructure investments are needed to help The National Energy Market get ready for higher levels of renewable generation12. One such investment is Project EnergyConnect13. Project EnergyConnect is the construction of a 900km, 330kV above ground transmission line between South Australia and New South Wales with an added connection in Victoria, being delivered jointly by ElectraNet (SA) and TransGrid (NSW). MAM acquired an additional stake in the asset in 2022, further participating in the broader decarbonisation opportunity.
Energy security and cost concerns: The global energy crisis has brought concerns about energy security and cost to the forefront for consumers, businesses and governments and in our view this has accelerated the energy transition.
A renewables-based energy system is likely to be both more secure and cheaper than a fossil fuels-based system14, so recent developments ultimately support the acceleration and the transition to a low-carbon energy system.
As a result of this increased focus on decarbonisation and the energy transition, MAM has observed a number of opportunities across traditional and emerging infrastructure asset classes including utilities and transportation.
MAM continues to see opportunities for organic growth, as well as a strong inorganic growth opportunity set in the platforms we own today but also through new acquisitions.
1 Source: Cambridge Associates, Macrobond, Bloomberg Finance LP. US equities: S&P 500 Index Total Return; Infrastructure: Cambridge Associates Infrastructure Index; Global equities: World MSCI; Global bonds: Barclays Global-Aggregate Total Return Index; Analysis conducted from 4Q2003 to 3Q2021. All indices quoted in USD. Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index (March 2022).
2 BNEF New Energy Outlook (NEO) (June 2021).
3 UN World Population Prospects (2019).
4 World Health Organisation, “Ageing and health” (October 2021).
5 Global Infrastructure Outlook: https://outlook.gihub.org/
6 https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf
7 Compared with 38% in 2021, according to BCG, “US Inflation Reduction Act: Climate & Energy Features and Potential Implications” (August 2022).
8 The World Bank: World Development Report 2021.
9 P43, Macquarie Asset Management, Real Assets Outlook 2023: The right horse for the current course.
11 https://www.safa.sa.gov.au/environmental-s-governance/energy
12 Benefits of Project EnergyConnect
13 https://www.projectenergyconnect.com.au/
14 World Economic Forum: https://www.weforum.org/agenda/2021/07/renewables-cheapest-energy-source/
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This information has been prepared by Macquarie Specialist Investment Management Limited (ABN 84 086 438 995 AFSL 229916) the issuer of units in the Fund(s) referred to above. The Fund(s) referred to above is only open to investment by wholesale clients (as defined in section 761G of the Corporations Act). The Fund(s) is not offered in the United States or to any US Persons. The information on this page is general information only and does not take account of the investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in the Fund. In deciding whether to acquire or continue to hold an investment in the Fund(s), an investor should consider the Fund's information memorandum. The information memorandum is available by contacting us on 1800 814 523. This information is intended for recipients in Australia only.
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