Erwin Thompson: What Are the Benefits of Infrastructure Investments?
High-net-worth investors are increasingly allocating capital to infrastructure funds. Here’s why.
In the 1990s, it may have seemed obvious what infrastructure meant: roads, bridges, airports, power grids, visible, physical assets historically funded by the public sector.
Today, there is a much broader definition: infrastructure can mean any capital-intensive asset necessary for the functioning or development of modern economies.
Much of this is provided directly by investable private companies in sectors including energy, environmental, transport and logistics, and digital infrastructure. It ranges from the fiber optics and data centers underpinning the internet, to ports and rail networks and waste to energy facilities, to the roof-top solar developers enabling all the energy transition and grid resiliency initiatives to be met.
Growth in private equity funding for infrastructure companies has largely come from major institutions with long investment horizons. In 2023, the world’s 75 largest institutional investors allocated $723bn to infrastructure, with Preqin data suggesting total assets under management increased more than 15 percent annually over the past decade.
Increasingly, however, high-net-worth individuals are also allocating capital to infrastructure as part of diversified private wealth portfolios, an intention mirrored by 48 percent of investment advisors in a late 2024 survey by Hamilton Lane.
What’s the appeal of infrastructure investing?
Infrastructure companies provide essential services, suggesting reliable or reliably growing underlying demand. No one knows precisely the future need for ports, data centers or electricity grids, but few would suggest the need is reducing.
With the right company, stable cash generation comes with value creation potential that could offer investors a superior return relative to the credit markets but with less of the risk associated with traditional equities.
This is because infrastructure seeks to include built-in downside protections. Its capital intensity creates barriers to entry, while inelastic demand (meaning the quantity doesn’t change or changes very little when the price changes) and often long-term contracted revenues are designed to protect against both inflation and recession.
For example, Cambridge Associates research suggests real returns for developed market infrastructure were 8 percent during accelerating inflation environments between 1973 and 2023, and 7.7 percent during times of decelerating inflation.
Combined, these qualities allow a differentiated return, with Goldman Sachs Asset Management finding that the correlation between listed stocks and infrastructure returns ranged from 0.4 to 0.5 between 2002 and 2022. Infrastructure consequently tends to play a hedging role in diversified portfolios.
“All this is happening as the world’s population is getting bigger, older and more affluent”
Why now?
Targeted returns have always been higher when infrastructure investments are associated with long-term demand growth. Today, several global megatrends are driving this at an unprecedented scale.
Decarbonization and the net zero transition promise to reshape the economy. Huge sums are needed not only for renewables and low-carbon power but also for transmission, smart metering, electric vehicle charging networks, and more, much of which is amplified by separate concerns about energy independence and grid resilience. In the EU alone, the figure required has been estimated at more than €700bn annually to 2030. Just as importantly, grids are facing increasing power demands for the first time in a while and need to be fortified.
The parallel need to mitigate and reverse environmental damage likewise points to a more sustainable, circular economic model. Our portfolio company Reworld owns or operates more than 90 sustainable waste management facilities across North America, for instance, processing 20 million tons of waste but also recycling or reusing 280 million gallons of wastewater and recovering more than 500,000 tons of metal, as resource efficiency becomes more important to industry.
All this is happening as the world’s population is getting bigger, older and more affluent, with the global economy projected to double by mid-century, and as digitalization and AI reimagine how people live and how businesses create value. Another EQT company, EdgeConneX, builds and operates more than 50 data centers – from hyperlocal to hyperscale – across four continents. It is expanding rapidly to meet enterprise demand for computing and connectivity, even as its focus on energy efficiency and renewable power aims to help customers meet their net zero targets.
These intertwined megatrends collectively demand infrastructure that we currently don’t have enough of. For example, In the US, only 23 percent of households had been connected to full-fiber broadband by 2023, while data centers’ share of electricity demand is predicted to rise from 1.5 percent of total US capacity today to 9 percent by 2030.
A critic may ask, ‘What’s new?’ Wasn’t electrification in the late 19th and early 20th centuries similarly profound and predictable once underway? Didn’t post-war plastics or computers in the 1980s and 1990s require similar investment?
The difference is the sheer number of megatrends in play at once, and their pace. In 2018, the G20’s Global Infrastructure Hub projected that $94tn of infrastructure investment would be required by 2040, but also that government contributions would fall short by $15tn – and that projection was made when governments were less fiscally constrained. Increasingly, the opportunity is clear for the private sector – and private investors – to step in.
What does effective infrastructure investment look like?
Infrastructure is not about making quick returns: whatever the sector, the whole premise is that it will be used for decades. That’s why it’s so well-suited to private equity with longer horizons than public markets usually allow.
As with any investment, it’s important to get the fundamentals right, not only selecting companies thematically around megatrends, but also ensuring they are known winners with strong people, resilient business models and growth potential.
Then it’s about being active owners, supporting them with industrial, technological and operational expertise so they can live up to that long-term potential.
EQT also has a diversified infrastructure portfolio, ranging from cash generating active core companies, to value-add companies with mature growth potential, and transitional infrastructure companies that are most closely aligned with net zero and AI.
EQT learned this playbook by operating dedicated infrastructure funds for more than 15 years, well before most private equity companies. The class has grown enormously in that time and is set to continue growing – especially as increasing numbers of high-net-worth individuals are allocating to infrastructure for the first time. It’s just one more way that this dynamic and vital sector is continuing to evolve.
Erwin Thompson joined EQT Partners in September 2009. Prior to joining EQT Partners, Erwin worked on UBS Investment Bank’s Americas Infrastructure & Privatization advisory team in New York City. He has also worked at BlackRock Asset Management and Bloomberg.
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