Outlook 2025
Rising interest rates and macroeconomic uncertainty led to a more challenging environment for infrastructure deal activity and fundraising in 2023 and 2024. Notwithstanding this, infrastructure’s return performance has proved resilient during this period, averaging 8.0% annualised over the six quarters from the start of 2023 through 1H24.1
With interest rates now falling and global growth likely to remain healthy in 2025, we see a constructive return environment for infrastructure over the next 12 months. Our proprietary data series of private markets infrastructure valuations suggests that multiples may have found a floor, and with interest rates falling across the developed world (DW) we expect them to move higher in 2025. Robust GDP growth should also boost earnings, making for a positive total return picture. In our view, infrastructure returns are likely to be in the 11-12% range next year, which is above their long-term average, but consistent with what the asset class has achieved in prior periods in which interest rates were falling and GDP growth accelerating.
In our view, infrastructure returns are likely to be in the 11-12% range next year, which is above their long-term average, but consistent with what the asset class has achieved in prior periods in which interest rates were falling and GDP growth accelerating.”
Infrastructure funds have raised $US71 billion as of 3Q24, and the full-year amount may be near the $US94 billion raised in 2023.2 Although the past six quarters have been a period of relatively weak fundraising for the asset class, we expect it to pick up going forward, driven by existing investors increasing their allocations as well as the expansion of the investor base. In 2024, institutional investors increased their target allocations for infrastructure to 5.5%, up 42 basis points from last year, while the average investor is still 123 basis points below their target.3
As of 3Q24, infrastructure deal activity stood at around 65% of full-year 2023 levels in value terms.4 With interest rates falling, we expect infrastructure deal activity to pick up pace in 2025, particularly in geographies characterised by strong policy support, transparent regulatory frameworks, and solid economic growth. In the EU, the electricity market reform adopted in May 2024, in addition to existing measures, should help accelerate investments by expanding the use of long-term contracts to support the green transition.5
In the US, since the Inflation Reduction Act (IRA) was signed into law, investment in clean energy production and industrial decarbonisation increased by 43% relative to the preceding two years, with utility-scale solar and storage investments increasing 56% and 130%, respectively.6 Under the new Trump administration, we believe it is unlikely for the IRA to be fully repealed given the numerous benefits it delivers in terms of job creation and economic development. In addition, with significant anticipated load growth7 and thermal retirements,8 the quantity of new generation will necessitate continued deployment of renewable technology as well as conventional energy sources. Given that in the US, onshore wind and solar are cost competitive on an unsubsidised level,9 we continue to view the US market as an attractive investment destination for the renewable energy and energy transition sectors. That said, risks may remain around timing – the speed at which clean power gets added to the grid and how fast the fossil fuels are phased out under the new US administration.10
Our analysis of valuations11 shows that private infrastructure valuations have a negative relationship with interest rates and a positive relationship with inflation. In 2022 the effects from these variables netted each other out, with valuation multiples relatively stable. However, in 2023 and 2024 moderating inflation and high interest rates resulted in downward pressure on private infrastructure valuations.
Figure 1 shows that the 12-month moving average of enterprise transaction multiples – enterprise value to earnings before interest, taxes, depreciation, and amortisation (EV/EBITDA) – for private infrastructure deals declined from 16.1x in June 2022 to around 14.0x in June 2024,12 a level more in line with the long-run historical average of 13.5x. Going forward, multiples may rise over the next 12 to 24 months.
Sources: Macquarie Asset Management, Inframation, Bloomberg (June 2024). Analysis is based on 1,138 transaction multiples from January 2008 to June 2024. Past performance is not indicative of future results.
According to the Cambridge Associates Infrastructure Index, over the past 10 quarters private infrastructure experienced only one negative quarterly return compared with four for global equities and six for global bonds.13 As of 2Q24, private infrastructure’s total return stood at 7.9% YoY, below its long-term average of 9.7%.14 As mentioned earlier, in 2025 we expect private infrastructure’s total return to be in the 11-12% range, in line with its historical performance in periods of falling interest rates and strong economic growth (Figure 2).
Sources: Macrobond, Bloomberg, Cambridge Associates (June 2024). Infrastructure represented by Cambridge Associates Infrastructure Index; global equities by MSCI World Index; global bonds by Bloomberg Global Aggregate Index. Analysis conducted from 4Q03 to 2Q24. Past performance is not indicative of future returns.
With improving economic conditions in 2025, we believe that investors may increasingly focus on growth assets while defensive core infrastructure will continue to be the cornerstone of infrastructure portfolios to protect against economic downturns. The investment opportunity set may increasingly be shaped by the secular trends of decarbonisation, digitalisation, and demographics.
From a sector perspective, transport tends to be well placed in an environment of improving GDP growth due to the historical relationship with demand growth. In 2024, roads performance has been supported by both traffic volume growth and the successful pass-through of inflationary costs through higher tolls.15 In our view, tailwinds should continue into 2025 on the back of stronger economic growth expectations supporting traffic growth. For airports, 2024 has been a year of recovery, with global air traffic surpassing the 2019 level and forecasts pointing to a robust 8% growth in 2025.16 With supply constraints having eased and bookings pointing to strong air travel demand, the outlook for the sector is positive. Global trade volumes stood at 2.3% YoY in 1H24 and are expected to grow by 3% in 2025.17 The risks in the sector have risen as a result of growing protectionism, although the outlook for ports varies depending on the volume mix and port location. Overall, fundamentals in transport look solid, while the sector appears attractively priced from a valuation perspective.
While investment opportunities exist across the digital infrastructure landscape, the tailwinds for data centres are particularly strong on the back of the rise in generative AI. The key data centre markets grew by a robust 15-25% YoY in 1Q24.18 However, as many core locations experience supply shortages, the sector is witnessing a shift towards secondary markets to overcome power and land availability constraints. Generative AI increases bandwidth requirements between data centres, resulting in a greater need for fibre network buildout. With financing conditions expected to improve in 2025, we believe the digital infrastructure sector is poised for a dynamic year.
In the regulated networks sector, in addition to electrification the expected surge in power demand driven by AI is likely to add to the growth of regulated-asset bases (RABs). In Europe, where 40% of distribution grids are more than 40 years old,19 scaling up electricity networks to accommodate greater demand for power and the integration of renewables could necessitate a doubling of annual capital investments until 2030.20 European grids are forecast to expand their RABs at a median compound annual growth rate (CAGR) of 7% between 2024 and 2030.21 That said, risks may increase in cases where there is a lack of alignment between regulatory frameworks, energy policies, and capex plans.22
Aizhan Meldebek
Global Infrastructure Strategist
[3960790]
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Past performance does not guarantee future results.
Diversification may not protect against market risk.
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The Cambridge Associates LLC Infrastructure Index is a horizon calculation based on data compiled from 93 infrastructure funds, including fully liquidated partnerships, formed between 1993 and 2015. Private indexes are pooled horizon internal rate of return (IRR) calculations, net of fees, expenses, and carried interest.
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