Effective exposure to secular trends through listed infrastructure

The underappreciated appeal of listed infrastructure

Mention the term infrastructure and you are likely to catch the attention of the more experienced investor. Infrastructure is the lifeblood of modern economies and offers a growing range of investment opportunities across public and private markets. While private markets have expanded significantly, we think that for most investors the more accessible public market should still be the first port of call. Why? The listed infrastructure universe offers a wide array of attractive opportunities across sectors and regions, many of which are not available through private markets. And while investment in infrastructure is intrinsically aligned with a longer-term approach, investors do not have to forgo liquidity or regular price transparency as is the case in private markets.

What we find particularly appealing about listed infrastructure is the ability to invest in what we call “enduring assets”, that is to say, companies that:

• Own long-lived physical assets that are critical to economies across the globe;
  
• Enjoy strong competitive positions that are relatively immune to technological disruption in sectors as diverse as power generation, transport or data infrastructure; and
• Benefit from a degree of contractual or regulatory protection.

Another key feature of these enduring assets is their structural exposure to secular trends — such as the rise of data or decarbonisation — that have the potential to transform entire societies and economies.

Effective exposure to decarbonisation

Undoubtedly the most important of these transformational trends is the drive towards decarbonisation in response to accelerating climate change. Investing in renewable energy infrastructure such as wind and solar power is the most obvious avenue for getting exposure to this systemic shift, but we believe investors need to be mindful that valuations already reflect much of the associated upside. Moreover, the growth in renewable energy generation only reflects part of the opportunity set. We think regulated electricity utilities offer an attractive, alternative way to invest in the energy transition, given the central role of electrical networks in the new economy, where everything from transport to heating and data storage will be run on electricity. Infrastructure businesses are, by definition, capital intensive. So, all else equal, the higher the future capital investment, the greater the future growth potential. In the case of electricity, the scale of future capital investment is exceptional as trillions of dollars will need to be spent over the next 20 years to modernise and transition the electricity grid away from fossil fuels. Notably, the International Energy Agency estimates that over the next 20 years, electric networks and renewable energy will require US$517 billion and US$585 billion of annual global investment, respectively (Figure 1).

As we expect this trend of increased investment to be secular, not cyclical, this could translate into higher prospective earnings growth rates for electric utilities for decades to come. In our view, the current valuations of electrical utility equities offer a good entry point for investors seeking to benefit from this future growth potential and contribute to the decarbonisation both of their portfolios and the wider market. As discussed in our 2022 equity outlook, we believe experienced active investors can take this potential even a step further, by identifying those utilities that appear currently behind the curve but that have significant scope to accelerate their transition.