Private investment in infrastructure has had sustained growth, with a compound annual growth rate (CAGR) of 18% from 2018 to 2023. Stable returns, low cyclicality, the ability to pass through cost inflation, a frequently regulated operational environment, and high barriers to entry have guaranteed unlisted infrastructure a spot in state-of-the-art strategic asset allocations, according a Boston Consulting Group’s new report.
Despite the 2023 decline in dealmaking and fundraising, the outlook going forward is positive. As evidence of the forthcoming recovery in infrastructure fundraising, limited partners plan to increase their commitments to the asset class. Led by pension funds and private wealth managers, limited partners expect to boost their investments by more than $600 billion by 2027.
The report titled Infrastructure Strategy 2024: Creating Value Through Operational Excellence highlights that energy, transportation and digital are key areas of investment and that infrastructure investors must redouble their commitment to operational excellence.
Geographically, the great majority of private infrastructure investment activity in 2023 occurred in Europe and North America. Almost 75% of the world’s infrastructure portfolio companies are located there.
The most active areas for deal-making are energy and environment, transport and logistics, and digital infrastructure, with social infrastructure seeing increasing investor interest.
Aggregate deal value of private investment in the energy and environment sector, which is seeing massive tailwinds from the global decarbonization agenda, totaled $1.1 trillion from 2018 to 2023, accounting for almost 45% of all private infrastructure aggregate deal value during the period, the report added. Most privately held assets in the sector focus on renewables and energy services; Europe hosts the largest share of assets, followed closely by North America.
Private investment in the transport and logistics sector totaled almost $510 billion from 2018 to 2023, comprising approximately 20% of all private infrastructure investment during the period. Railroad, air-related, and sea-related projects make up the majority of privately held assets in this sector.
Private investment in the digital infrastructure sector from 2018 to 2023 totaled nearly $420 billion—almost 20% of all private infrastructure investment during the period. In 2023, most of the activity in Europe in this sector focused on privately held data-center assets, while the vast majority of assets in North America were in mobile data and end-user services.
On the other hand, as costs rise and the potential for returns from higher multiples and reduced debt diminishes, investors in infrastructure assets must take a more refined approach to generating returns. Operational improvements in portfolio companies will become even more critical to creating value.
In this regard, funds that want to be leaders will follow a clear playbook:
- Focus on the full investment cycle. All too often, funds restrict their operational value creation efforts to extrapolating sell-side plans or devising plans that cover only the first 100 days after closing a deal. In contrast, leaders begin planning at the due diligence stage, developing and quantifying a clear hypothesis on how to improve operational performance throughout the ownership cycle to serve as a foundation for their efforts.
- Assess all value creation levers. Leaders take into account every potential operational lever in the value creation framework in light of the portfolio company’s future positioning, including both top- and bottom-line levers—even if the value creation plan focuses on a selection of the most promising initiatives.
- Institute performance requirements. By commanding a systematic value creation framework, leaders ensure that they have an excellent management team and the right capabilities in place. They also establish proven governance mechanisms and foster needed cultural changes—all in order to create the greatest value through operational improvements.
“Infrastructure investing has been put to the test by recent macroeconomic uncertainty, but the path to value creation is clear,” said Alex Wright, BCG managing director and partner, and a coauthor of the report.
To download the complete report, please click on the following link.
