What are the benefits of infrastructure investments?
Infrastructure assets are underpinned by certain key characteristics. They are capital intensive, often based in specific locations, and are very hard to replicate. They generate revenues under long-term contracts or via regulatory frameworks that are inflation linked or have inflation pass-through characteristics, and they tend to have low maintenance costs. Given these characteristics, the assets have been resilient through market cycles, offering low volatility and the potential for attractive income and capital appreciation. Infrastructure assets also have exhibited low correlations compared with other traditional asset classes, providing diversification benefits.
What structures are making these investments more available to wealth investors?
Historically, investors could choose from traditional public infrastructure equities and bonds, accessed through buying individual securities, exchange-traded funds or mutual funds, or via private infrastructure equity funds where capital might typically be locked up for 10 to 12 years and is invested over several years. Now, the new frontier is semi-liquid funds that invest in private infrastructure and seek to provide the wealth market with access to what has historically been available only to institutions and the wealthiest of individual investors.
What are the tailwinds driving opportunities within infrastructure?
There’s immense opportunity for investment. Infrastructure is buoyed by strong, generational tailwinds from what we call the 3-Ds: digitalization, decarbonization and deglobalization. Digitalization is about data. The amount of data we generate globally doubles about every 18 months. It needs to be transported, processed and stored, requiring significant capital investment to modernize our digital infrastructure. This includes everything from upgrading communication networks from copper to fiber for faster speed and more bandwidth, to building out additional cell towers to support 5G and data centers to support the increasing amounts of data being produced and support development of artificial intelligence.
Decarbonization starts with renewable power generation but also includes such things as transmission assets to connect renewable power to the grid, as well as promote smart, greener home innovations. We have invested in businesses that provide things like heat pumps, generators, solar rooftop panels, energy storage and electric vehicle charging stations to homes.
Lastly, the push toward deglobalization is under way as companies work to shorten global supply chains and make them more efficient by doing things such as automating ports and moving the manufacturing of critical goods closer to the home market. Governments around the world are also focused on energy security, ensuring consistent and reliable supply.
How is the regulatory environment helping?
The above trends have been strengthened by recently passed legislation. The Infrastructure Investment and Jobs Act (IIJA) and the CHIPS and Science Act in the United States are major new laws that are creating new opportunities for investment.
For example, the IIJA is the first major U.S. policy act that is focused on achieving a net-zero emissions future, with over $300 billion in tax credits, incentives, rebates and grants to accelerate the energy transition. This should provide a significant boost to clean energy investment, especially given green energy tax credits.
Why should investors consider an allocation to infrastructure?
When managed by a knowledgeable owner/operator, infrastructure should not produce surprises. When managed correctly, it could be that “invest and forget” type of holding in an investor’s portfolio, offering the prospect of compounding, attractive low-risk growth over the long term. For all these reasons, we believe this is an attractive opportunity investors should consider.
The original version of this Q&A appears on the Brookfield Oaktree website here.