Asset Owners and Managers to Target Renewable and Social Infrastructure

Report identifies prevalence of renewable energy in portfolios, but strong future interest in data-related projects.

Asset managers and owners plan to increase investment in renewable energy and social infrastructure over the next three to five years, according to a research report from Boston Consulting Group and EDHECinfra, an analytics arm of the EDHEC Business School focused on the unlisted infrastructure asset class.

While more than half (58%) of those surveyed said they would increase their investments in data infrastructure, 49% plan to grow their investments in renewable energy infrastructure projects and 48% in social infrastructure. In total, global assets under management (AUM) for infrastructure investments will reach a record high of US$950 billion in 2022.

All investors covered in the report are planning to overinvest in digital infrastructure in the future. Investments include data centres, towers, satellites and subsea connections, with the appetite for broadband connectivity high. Roman Friedrich, a BCG partner and a co-author of the report, said the increasing desire for higher speeds and reliable online access would lead to a huge expansion of fibre optic installations in new networks in developing nations as well as in existing networks in more developed countries. “Ultimately, fibre will replace legacy (primarily copper) infrastructure completely, particularly as 5G rolls out,” he said.

Renewable and conventional power investments

The report identified several existing investment trends, including the prevalence of renewable energy in investor portfolios. “With the notable exception of (Australian) superannuation investors, who have put significantly less weight on renewable power investments, all infrastructure investor styles now include a quarter to a third of renewable energy projects,” it said.

However, “power and gas still pay” as – behind transport – gas and conventional power generation were the main beneficiary of the 2021 recovery, the reported noted. The investors that were more exposed to power and gas benefited more than the peer groups that had mostly divested from conventional power generation.

Contracted infrastructure projects, in which infrastructure providers have long-term revenue agreements with the public sector or private companies to deliver specific services, have overtaken more traditional infrastructure investments such as airport and utilities acquisitions. Contracted projects are now the “basic building block of almost every infrastructure investor’s portfolio”, representing between 50-70% of infrastructure AUM across all peer groups.

The report compares investment styles and risk-adjusted performance of 16 peer groups of infrastructure investors from EDHECinfra’s database of 379 infrastructure investors. The members of each peer group have an investment style in common and groups are divided into four broad categories: global peers, home peers, asset manager peers, and asset owner peers.

Investment strategies are influenced by investor type and also by geography, given the market is determined by national infrastructure procurement and policy choices, and assets are “completely immobile”.

Asset owners were found to have outperformed asset managers in large part because they are less risk averse, with about 60% of their investments in merchant or regulated businesses (riskier because new rules, rating systems, and market conditions can impact their financial performance) and higher allocations in the riskier energy and water resources and transport sectors.

Geographical differences

North American pensions funds were found to have the highest risk-adjusted returns in 2021 while pension funds in the European Union and the UK take less risk, but achieve comparatively lower returns. The North American funds earned the top ranking by having a performance-focused portfolio, allocating more of their investments to merchant assets. The Australia-New Zealand and ‘rest of the world’ peer groups (the latter being chiefly investors from Asia and the Middle East) also performed well because of exposures to riskier segments, although their mix includes significant exposure to transportation investments and less exposure to conventional energy supply and generation.

US investors overall enjoyed high returns in large part because of their preference for merchant business models, such as power plants and transport companies.

Operational value creation is paramount, said the report’s authors, with many investors saying the focus will shift towards more “hands-on value creation”. This is attributed to the steep increase in asset prices, dealing with inflation and the rise of factor prices, as well as secular trends such as energy transition and digitalisation, which have made operational value creation a “must have” capability for asset managers across all industry sectors.

Investors perceive that infrastructure investments are becoming more volatile, a trend that will be exacerbated by inflation and secular shifts, such as the energy transition and digitalisation. Consequently, basing an infrastructure investment strategy on hoped-for long-term returns, rather than consistent operational value creation, is no longer viable, according to the report authors. This is something that “asset managers as well as direct investors, such as pension funds, are keenly aware of now”.

As the number of infrastructure investors increases, strategic questions grow in importance. Investors need to address a range of issues, said the report, including how to select their exposures to different segments of the infrastructure universe; what risks and returns they can expect; strategic choices they should make to develop portfolios; and how the direct investment model compares with accessing infrastructure investment via fund managers.

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