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Infrastructure Investment in the Global Clean Economy

Overview of Global Infrastructure Market

Green Capex Requirement to Meet Sustainable Development Goals

Estimated $6 Tn of annual investment is required through 2020 – 2030 to meet Sustainable Development Goals (SDGs), this is an increase from previous levels of approximately $3.2 Tn per annum

As per Goldman Sachs Research and FactSet, Half of this $6 trillion annual investments is needed for decarbonization to be on path for Net Zero by 2050. There is a need for $1.8 trillion of annual incremental decarbonization investment in the 2020s and $1.0 trillion for infrastructure/water

The incremental $2.8 Tn of annual investment needed each year, though this decade represents approximately 2.7% of global annual GDP. Currently only one third of this incremental $2.8 Tn annual investment requirement is on track from the private sector

Geographically China and the US should represent the greatest percentage of overall and incremental Net Zero/infrastructure investment needs. In 2019, China emitted around 28% of global CO2, while the US emitted about 15%

With continued inflationary pressures, there is a potential upside risk to the $6.0 trillion annually that is required for this decade. At the same time, the potential for greater deployment of solutions could increase the pace of innovation in areas like hydrogen, battery storage and energy efficiency

*Clean water infrastructure includes infrastructure to secure access to clean water and sanitation

Source: Goldman Sachs Global Investment Research

Annual Capital Investment in Global Energy Transition

Capex Requirement by Region & Sector

China, US & Europe represent more than half of the required investment for the Net Zero by 2050 pathway, consistent with a weighting of overall emissions. Meeting Net Zero objectives will likely require capex of about $11 Tn in the EU by 2050 and $16 Tn in China by 2060 (as China is pursuing a Net Zero Path by 2060, which means spending will be less in the 2020s than what would have been required to reach Net Zero by 2050)

In the US, a combination of demand efficiency and increased deployment of additional clean generation capacity is needed to accomplish the goal set by President Biden to reduce US greenhouse gas emissions 50%-52% by 2030 vs. 2005 levels

Meeting the Net Zero pathway objectives involves not only the expansion of power plant capacity but also of transmission lines, batteries, charging infrastructure, and carbon capture/sequestration, supported by an investment-friendly policy framework ahead of aggressive capex increases

Global Infrastructure Fundraising

Infrastructure has recently become one of the fastest-growing asset classes, with total assets under management (AUM) topping $1 tn by March 2022. Dry powder in the asset class continued to rise between the end of 2021 and Q3 2022 and was up by 17% over the nine months. As unrealized values have risen strongly, dry powder’s share of AUM has reduced from 38% in 2020 to less than 30% in 2022

2022 has been infrastructure’s most active year of fundraising by far. Data to Q3 reveals $138.8bn was raised by just 67 funds. Most of this fundraising came in the first six months of the year, with over $126bn raised by the end of the second quarter

President Biden’s legislative program has been a major driver behind this increased activity level. The sector has also benefited from infrastructure’s ability to provide inflation hedge resulting from the contractual structures that many assets utilize

In terms of total capital raised, the top 10 unlisted infrastructure funds have historically been responsible for the lion’s share and the trend continues. Until Q3 2022, 70% of the total capital raised has been allocated to the top 10 infrastructure funds

13-18 months span seems to be the sweet spot at which 80% of funds currently secure above-target closes. For this group, the average fund size is over $3.8bn. This is where the mega funds tend to settle in terms of time on the road

Brookfield stands as the clear leading fundraiser in the asset class based on funds raised in the last 10 years, having raised 22% of the total value raised by the 10 largest fundraisers in this period

Global Infrastructure Fundraising by Primary Geographic Focus

Of the total capital raised by unlisted infrastructure funds until Q3 2022, North America-focused funds held 68% share

The last time North America-focused funds held above 50% share was in 2008, during which it was 58%. In comparison, this measure has averaged 42% between 2011 and 2021

The Infrastructure Investment and Jobs Act (IIJA) of 2021 and the Inflation Reduction Act (IRA) in 2022 combine to provide c.$1.6tn of funding over the long term, but their signal for investment is as influential as the direct funding they mandate

In terms of the total number of funds closed, Europe has historically held the leading position among all regions. Although in 2022, until Q3, North America had a slight edge over Europe, where 27 funds have been closed in comparison to 26 in the latter

Central banks are still catching up in terms of taming surging prices. The inflation breakdown by region differs, with a larger share in Europe driven by energy components of CPI

In the US, despite high global oil prices, other factors like household rent and mortgage payments are having more influence on general price increases

Global Infrastructure Fundraising by Strategy & Largest Funds Closed

Global Infrastructure Deals

The deals market in recent years has been increasingly volatile. After a peak in aggregate deal value in 2019, the market went down during the pandemic in 2020, resurging in 2021, fuelled by fiscal and monetary loosening. This has been followed by an inflation-driven correction in 2022

Despite this turmoil, the asset class is cementing its grip on the central sector for all economies. But beyond sector breakdowns, regional deals by number and aggregate values show less discernible trends because of the influence of infrequent mega deals

The telecoms sector has grown within the asset class, buoyed by the demands of home working and online retail amid pandemic lockdowns. The sector has quickly increased its share of aggregate deal values, overtaking utilities and even transport in the data to Q3 2022

In terms of project stage, secondaries’ share of total deals has waned as greenfield has shown more resilience to falling numbers of deals recently

The peaks in activity in recent years are driven by the secondary market, with 2019 and 2021 notable for increases in the aggregate deal value off the back of secondary transactions, reflecting the more heated markets in those periods

In terms of the performance of the asset class, investors may be reassured by the resilience of the index to Q1 2022. Against sharp drops in venture capital and the S&P 500, infrastructure has bucked the trend to deliver a 19-point increase to reach 353

Infrastructure Asset Under Management

Global infrastructure investment is currently lagging from where it needs to be. It’s estimated that $23tn worth of investment is required to meet the Sustainable Development Goals by 2030 & stay on track to net zero by 2050

Unlisted infrastructure AUM is forecasted to catch up to that of real estate, reaching $1.9 tn in 2027. This entails AUM in the asset class from 76% of real estate AUM in 2022 to 88% by the end of 2027 as the emerging tighter monetary environment will have a more significant impact on real estate

Although North America has maintained its lead over Europe in terms of total AUM so far, the latter is forecasted to be ahead from 2025 onwards

Core and core-plus as a strategy remains in the leading position for the forecasted period followed by value added & opportunistic

Core infrastructure performance in North America correlates with real disposable income. With inflation expected to remain high there might be downward pressure on performance as real incomes are constrained

However, given that surging energy prices and the subsequent abnormally high profits for energy companies are core drivers of inflation, some infrastructure investors in private markets will benefit from the energy squeeze

Infrastructure Performance

The infrastructure asset class continues to recover from the global pandemic, with one-year returns to Q1 2022 riding high at 19.4%, well above the longer-term average of 10.3% for vintages between 2007 and 2019

The resurgence in oil prices, as demand quickly bounced back after lockdowns, saw the S&P Global Oil index one-year return to Q1 2022 soar well above even unlisted infrastructure at 34.5%. However, these high oil prices are benefiting the asset class as wholesale energy prices ride high on the back of resurgent demand and constrained supply caused by Russia’s invasion of Ukraine

In terms of successful strategies, the data shows continuing outperformance by value-added funds, while larger Europe-focused funds also broadly outperform

Infrastructure Performance – Investor’s Expectation

Investors are more optimistic about the near term than managers, with fundraising competition and exit concerns playing on GPs’ minds

As investors review the last year, many will be reeling from the prolonged bear market in stocks alongside an almost equally dismal performance in fixed income

As per Preqin survey, 70% of investors reported their infrastructure investments had lived up to expectations over the past 12 months, slightly higher than the 67% average of 2017

The second highest proportion of investors cite a reduction in portfolio volatility as a reason for allocation to infrastructure (36%) after private debt (42%)

Investor expectations for the performance of their infrastructure portfolios compared with the last 12 months have returned to pre-COVID norms

There is a near-equal balance of those expecting better performance (19%) and those who expect worse (20%)

Infrastructure’s one-year net IRR to Q1 2022 was 19.4%. This still includes recovery from the impact of COVID-19 and will have waned somewhat since, as the economic climate bears down

Expectations aside, investors are planning to dial down on previous commitments in the coming year

Energy Transition – Role of Infrastructure

The global energy transition is underway, with an estimated $275 tn of investment needed across economies to reduce carbon emissions to net zero by 2050. Much of this is required to decarbonize energy generation. The need for investment in renewables has never been so immediate. This underpins the scale of the opportunity

Energy has always been at the center of the global infrastructure asset class, but its long-term prominence has risen even further. Long-term deal data reveals its share of deals by number has steadily increased from below 40% in 2006 to above 60% in recent years

The dominance of energy as an asset class is mainly attributed to a growing number of renewable deals. Although despite their growing share of total deals, they do not absorb nearly as much capital as conventional energy deals

Renewables fundraising in the last few years has risen dramatically. 2020 saw the aggregate capital raised by renewables-focused funds increase by 69% to $60bn and remain at this level since

Recent events have demanded a reconsideration of the energy transition, with many being forced to acknowledge that carbon-intensive conventional energy can not simply be substituted by renewables mainly because intermittency of renewables and insufficient energy storage currently leaves grids exposed, threatening the reliability of supply

Energy Transition – Key Recent Trends

ESG commitment in the asset class is on the rise

Fundraising data on the split between energy funds focused on renewable and conventional sources shows a clear reversion. Since around 2016, renewables-focused fundraising has tended to displace that of conventional energy, with 2021 recording 69% of capital raised for renewables compared with just 14% for conventional energy

§ Investors hoping to green their portfolios toward ESG targets have driven much of this medium-term trend. However, Q3 2022 data on this mix reveals a rebound in commitments to conventional energy funds, with the share of fundraising doubling to 28% compared with 2021. This is in response to higher gas and oil prices and the returns they deliver

Volatility drives demand for price stability from corporates

The volatility in energy prices last year has cemented a longer-term growth trend of corporate power purchase agreements. However, as interest rates and construction costs have risen, challenges have emerged for some developers in meeting these agreements and driving re-negotiations

Developers securing PPAs may restrict their upside gains. However, it helps ensure greater leverage, hence reducing capital outlays for the fund. In the US, the PPA market is more advanced

In Europe, the long-term contracted revenue models include auctions or contracted PPAs. Recent years have seen keen interest in auctions, including the UK

Hydrocarbons and renewables are complements, not substitutes

Although Governments have been effective at scaling up the renewables rollout, hydrocarbons are unlikely to be pushed out as quickly as anticipated. The challenge will be to make the transition away from carbon-intensive sources seamless

Investment in Energy Transition

According to BNEF, global investments in the clean energy transition hit $1.1 trillion in 2022, roughly equal to the amount invested in fossil fuel production. This is the first time that annual investment in sustainable technologies surpassed the $1 trillion mark. Although the amount represents a 31% jump from 2021, it’s still just a fraction of the requirement to meet net-zero emissions by 2050

In terms of technology, the majority of the investments in clean energy were driven by solar and wind, reaching $495 billion, a 17% increase from 2021. Electric vehicles come close second with $466 billion of investment, marking a stiff 54% increase over the previous year

In terms of region, nearly half of all global energy transition investments – $546 billion were in China, followed by European Union and US with $180 billion & $141 billion of investment, respectively

In 2022, US renewable energy growth slackened due to rising costs and project delays driven by supply chain disruption, trade policy uncertainty, inflation, increasing interest rates, and interconnection delays. But growth will likely accelerate powered by robust demand and the record-breaking raft of clean energy incentives in the Inflation Reduction Act (IRA)

EU saw a remarkable acceleration in the energy transition, partly because of the energy crisis, with record renewable energy installations and electric vehicle sales. The outlook for low-carbon transition continues to look extremely bright. The EU has reached an agreement on the FiT for 55, RePowerEU and carbon border adjustment mechanism. All these together are setting the scene for faster decarbonization across the bloc