Infrastructure Strategy 2023 – Building the Green Hydrogen Economy

Executive Summary

Infrastructure investments are increasingly becoming mainstream. They have emerged as one of the most attractive alternative investments today because data shows that they can withstand inflationary pressures and demand fluctuations better than other kinds of investments can. Although assets under management in the infrastructure industry were only around $0.3 trillion in 2015, they increased over the next seven years to reach $1.1 trillion in 2022—a growth rate of 21%, almost twice the 11% at which investments in all alternative assets grew. The large infrastructure funds got bigger, too; the ten largest funds that closed in 2022 raised $36 billion more that year than in 2021.

As governments try to rebuild the world’s infrastructure with an eye toward ensuring a carbon-neutral world, the infrastructure investments market will continue to expand. Several governments have sought to create environments more conducive to private sector investment in infrastructure businesses, especially since public finances are limited. In the US, the Infrastructure Investment Jobs Act (IIJA) and Inflation Reduction Act (IRA), enacted in 2021 and 2022, respectively, will boost infrastructure development. In the EU, the RepowerEU strategy will reduce the region’s dependence on fossil fuels. Our studies indicate, however, that the recent rise in infrastructure asset prices—along with the global economic uncertainty and changes in interest rate regimes—has introduced an element of volatility into the market.

The BCG-EDHECinfra study of the risks facing infrastructure investors and the returns that their investments generated found that asset owners did better than asset managers in 2022, and that infrastructure investors in Australia and New Zealand were the best performers geographically. Specialized infrastructure fund managers generated higher returns than multi-asset managers did last year, and UK pension funds topped North American pension funds, global insurers, and sovereign wealth funds.

The study also found that success in the current environment requires fresh approaches to investing and value creation. In fact, an analysis of the drivers of infrastructure investment performance over the past three years indicates that investors’ yields came primarily from declining debt and rising price-earnings multiples and that their performance on operational value creation was, at best, mixed.

Going forward, infrastructure funds will invest more in larger projects, which will take longer to evaluate, especially since there is currently a dearth of megaprojects. The larger funds will invest through development platforms, which channel public and private funds into projects that aren’t commercially viable. And the smaller funds will specialize by geography or sector. According to a survey that BCG conducted last year, infrastructure asset managers will continue to increase their investments in digital businesses, such as network utilities and data
infrastructure, and in sustainable businesses, such as renewable energy. This sector contains both older segments, such as solar power and wind energy, and newer ones, such as hydrogen, which is turning into a lucrative investment opportunity.

In 2021, demand for hydrogen was around 94 million tons, most of it in the form of gray hydrogen, which is produced from methane or natural gas and therefore isn’t environmentally friendly. But by 2050, demand for low-carbon hydrogen will approach 350 million tons per annum (mtpa) under a 2°C global warming scenario or 530 mtpa under a 1.5°C scenario. Governments and companies will have to invest approximately $6 trillion to $12 trillion between 2025 and 2050 to produce and transport enough low-carbon hydrogen to meet demand, according to BCG’s calculations.

Although investment opportunities will extend across the hydrogen value chain—from feedstock development and generation to hydrogen transportation and storage—$300 billion to $700 billion of that amount must be deployed soon, from 2025 to 2030. At each link in the value chain, the need for capital will vary by geography, with regional economic policies influencing infrastructure investors’ choices. Crucially, four novel strategies can help infrastructure investors gain first-mover advantage in the hydrogen industry.

Building Portfolios with Infrastructure. Performance, Cash Flows & Portfolio Allocation

Using asset- and fund-level data, we highlight important differences between infrastructure assets and funds, and compare their historical performance and cash flow characteristics with both public and other private investments. An infrastructure asset’s age, sector, business risk and corporate structure all influence the asset’s risk-return profile. We examine the sensitivity of infrastructure asset and fund performance to public markets by regressing infrastructure returns (at the aggregate, sector and age group level) on public asset market returns.

We then develop a method to estimate infrastructure equity assets’ income returns and cash flows depending on their age and sector. With measures defined that capture both idiosyncratic and time-series income return volatility, we highlight that a CIO cannot ignore the high idiosyncratic risk of infrastructure assets when evaluating their future performance and cash flow risk. To reduce a portfolio’s idiosyncratic income return risk, we find that adding assets from the same sector may be as efficacious as adding the same number of assets from different sectors. We show how many assets are needed before idiosyncratic income return risk starts to level off.

Inflation and Rising Rates: Impact on Infrastructure Assets

In this report that was produced in collaboration with Ares Asset Management, we illustrate that private infrastructure assets can provide resilience in the current rising rate and high inflation macroeconomic environment. The primary structural reason for this resilience is the ability of private infrastructure assets to increase revenues along with inflation. 

We believe this report will serve to remind readers of the fundamental drivers that have underpinned the development of this asset class and that it will illustrate the widening opportunity set that we believe will unfold in both the primary and secondary markets in the years to come.

Do financial investors need non-financial data? Infrastructure ESG Data Investor Survey, 2022 Edition

In this infrastructure ESG survey, we asked a large sample of investors in infrastructure why they need to have access to ESG data i.e., non-financial data, for the assets they hold or want to hold. We examine three main questions:

1. What is the main purpose or use-case of non-financial (ESG) data for investors in infrastructure?
2. What risks most require non-financial data to make better investment decisions in infrastructure?
3. What kind of data is the most useful and relevant to make such decisions?

In summary, with this survey we have shown that investors in infrastructure have clear priorities and preferences when it comes to non-financial or ESG data.

The cost of international sanctions to investors in Russia’s airports

In this research note, we look at the potential loss of value of Russian airports due to the war in Ukraine. Drivers of impact include the closure of a number of national airspaces to Russian airlines as well as related sanctions that have been imposed since the start of the invasion. We find that the immediate impact on the cash flows of Russian airports so far remains very limited, and it is equity holders who will suffer most; the increase in the price of equity risk is many times more painful for investors marking to market.

As a one-off immediate shock, the loss of value for investors exposed to Russian airports in March 2022 is estimated to be less than 5%. However, we show that this cost will increase rapidly the longer the conflict and the sanctions continue. Domestic traffic will be quickly – and severely – reduced by Russian airlines’ inability to keep foreign-made planes flying and the compounded effect of higher discount rates will rapidly burn through the NAV of these assets.

Infrastructure Strategy 2022: A Pivot to the Digital Frontier

Massive infrastructure funding recently approved by the United States, China, and the EU, as well as ongoing improvements in low- and middle-income countries, are placing a renewed emphasis on infrastructure investments. Indeed, fund raising for public and private infrastructure investments—which include everything from power generation and renewable energy facilities to schools, hospitals, digital networks, water resources, and transportation projects¬—is hitting fresh highs: in 2022, global assets under management of private infrastructure investors are forecast to reach a record $950 billion.

While infrastructure investment opportunities are rife, returns from these projects vary. Some investment strategies are well suited for big gains in today’s environment; others are designed for smaller, albeit consistent, returns. Given the many possible investment strategies and the growing popularity of infrastructure investments as a whole, BCG and EDHECinfra, a provider of indexes and analytics for infrastructure investors, have partnered on “Infrastructure Strategy 2022,” the first in a series of annual reports intended to categorize the universe of investors by their priorities and focus as well as by their risk-adjusted performance.

The centerpiece of this report is the division of infrastructure investors into 16 peer groups that can be further broken down into four categories: global peer groups (which include asset owners, such as pension funds, endowments, and sovereign funds, and asset managers, such as private equity funds); home regions; asset manager styles; and asset owner styles.

EDHECinfra Research Insights – June 2021

Table of contents: The fair value of investments in unlisted infrastructure equity by Frédéric Blanc-Brude, Abhishek Gupta The volatility of unlisted infrastructure investments by Abhishek Gupta, Frédéric Blanc-Brude, Luna Lu, Amanda Wee The next generation of data for infrastructure investors …

The choice of performance test benchmark of Superannuation funds’ investments in infrastructure

Submission to the Australian Treasury

In this contribution to the exposure draft consultation on the “Your Future, Your Super” package, we do not comment on the general approach taken by the regulator to benchmark MySuper products but solely focus on the choice of benchmark for the unlisted infrastructure asset class. We propose abandoning the use of listed equity indices to proxy investments made in the unlisted infrastructure equity asset class in the proposed performance tests of MySuper products. We argue that recent advances in data collection and innovation in asset pricing provide a robust and academically validated alternative to the currently proposed benchmark. This listed equity index (the FTSE Developed Core Index) is wholly inadequate because it is not representative of the universe or of the risks to which Superannuation products are exposed when investing in unlisted infrastructure. Instead, the infra300, an index built to be representative of the unlisted infrastructure universe, constitutes a robust and fair alternative that can benefit plan members and managers alike as well as meeting the prudential objectives of the regulator.

Towards a Scientific Approach to ESG for Infrastructure Investors

This paper explores the role of environmental, social and governance (ESG) issues in an investment context, namely how institutional investors should incorporate ESG elements into the financial management of their portfolios. A growing number of investors are pursuing ESG objectives to directly improve environmental and social outcomes, either to satisfy mandates from their members or to conform to the expectations of society. This is increasingly the case even though these organisations have primarily been created to deliver investment outcomes, in particular retirement income. Consequently, investors may wish to exclude certain types of assets from their universe such as coal-fired power plants or projects mired in social controversy. However, regardless of motivation, ESG-related decision making will have a financial impact on portfolio performance. It is this area that we investigate here – the role of ESG within an infrastructure portfolio from a strictly financial standpoint.

Le coût du capital dans les concessions autoroutières en France – Pour une approche moderne de la réglementation des péages

Une nouvelle publication de recherche de l’EDHEC Infrastructure Institute dont les conclusions sont reprises dans leur intégralité par le rapport de Commission d’enquête du Sénat sur « le contrôle, la régulation et l’évolution des concessions autoroutières » publié le 18 Septembre 2020, met en lumière l’archaïsme de la réglementation des péages dans les concessions d’autoroutes en France, et appelle à ne pas attendre encore 20 ans pour remédier à une situation avant tout préjudiciable aux usagers.

Le rapport de Commission d’enquête du Sénat mais en avant des chiffres publiés par l’Autorité de Régulation des Transport (ART) le 31 Juillet 2020, selon lesquels le rendement global (à la fois historique et attendu) du capital des concessions autoroutières en France serait entre 6.4% et 7.8%. Si on ajuste ces chiffres pour prendre en compte le rendement de la dette sur les bilans des différents concessionnaires, on obtient un rendement moyen des fonds propres entre 27% et 35%. Cette belle performance financière à une contrepartie : la cherté des péages perçus sur les autoroutes concédées françaises.