Does infrastructure support more private participation?

Infrastructure’s vital position in the economy has drawn investors, government assistance, and media attention. Furthermore, the industry is experiencing strong tailwinds due to the difficulties posed by aging bridges, the pressing need to decarbonize, and other factors. However, given investors’ caution in a period of increased interest rates, the requirement for investment surpasses the cash available thus far. Businesses and investors alike must acquire the skills necessary to build robust companies with promising growth opportunities.

Infrastructure: An Economic Driver That Requires Funding

Infrastructure makes transportation, supply chains, electricity possible, and information sharing possible, all of which serve as the foundation for economic growth. Infrastructure spending yields a disproportionate return on GDP; in the US, it is a three-fold fiscal multiplier.

However, the US market has only seen 1.5% of GDP invested in this potent economic engine, compared to 5.1% for China and 2.5% to 3.5% for the other BRICS countries (Exhibit 1). Aging and poor performance are indicators of underinvestment, as seen by the US infrastructure ranking 13th in the world in 2019 (down from 9th in 2018).

Exhibit 1

Investors Are Taking Notice

Nonetheless, both the public and commercial markets are showing interest in this industry. Following the pandemic-caused decline, the infrastructure sector saw a robust recovery: total shareholder returns (TSR) for the US Infra ETF have averaged 20.9% since April 2020, compared to 19.4% for the S&P500 (Exhibit 2). This is true even though historically the sector has lagged (a six-year TSR of 9.1% compared to the S&P 500’s 12.6%).

Exhibit 2

A slowdown in 2023 followed the rally as investors responded to an increase in interest rates. Nonetheless, a recovery in private investment is anticipated. Positive indicators include a few significant transactions in the first quarter of 2024, such as the $150 billion asset under management (AUM) merger between BlackRock and GIP and the $96 billion AUM acquisition of Actis by General Atlantic. By 2027, limited partnerships are predicted to increase investment by over $600 billion. With their large dry powder of $340 billion, institutional investors who are new to the infra space (less than ten years of experience) are aiming to enhance their exposure.

Exhibit 3

Governments also fund infrastructure through a range of programs. Recently, two US legislation have set aside money for infrastructure improvements. $350 billion of the $1.25 trillion budget included in the Infrastructure Investment and Jobs Act (IIJA) has already been awarded. The remaining funds are scheduled to be distributed by 2030. Furthermore, by 2030, the Inflation Reduction Act will have set aside $500 billion mostly for sustainable energy projects. during 200,000 new jobs are expected to be created in the near future as a result of this investment, and another 1.5 million employment during the following ten years.

The industry expanded its EBITDA margin above market, although it lagged behind in terms of sales growth and cash flow generation (Exhibit 4).

Exhibit 4

Priority Areas for Future Success

To improve performance, boost valuations, and attract private capital, infrastructure companies can have the greatest impact by prioritizing four key areas: active portfolio management, prioritizing the right areas for innovation, setting a high bar on operating performance, and effective investor engagement. Active portfolio management increases the odds of delivering high performance when companies divest noncore assets and focus on strategic M&A.

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