An asset takes centre stage

Infrastructure investments have become increasingly popular among asset owners such as pension funds, insurers and sovereign wealth funds. As long-term investors, they are drawn to assets like transportation, energy and digital networks to diversify portfolios and earn stable, inflation-protected returns.

Singapore wealth fund GIC Pte Ltd, for instance, has increased the share of infrastructure investments to 13% of assets from 10%. Based on the Sovereign Wealth Fund Institute’s estimate that GIC had around US$800 billion of assets as of March 2024, the wealth fund probably has roughly $104 billion invested in infrastructure.

In neighbouring Indonesia, the Indonesia Investment Authority (INA) has been actively engaged in infrastructure-related deals over the past 12 months. Last December the wealth fund and Norwegian private equity firm Norfund signed an agreement to co-invest in renewable energy, financial inclusion and green infrastructure in Indonesia. Two months earlier, INA teamed up with Dutch pension fund APG and the Abu Dhabi Investment Authority to invest in a toll road in Sumatra in Indonesia.

Nick Langley, portfolio manager with ClearBridge Investments, and Nicholas Kuys, managing director for infrastructure Asia at Partners Group discusses infrastructure investing trends and the outlook in this Q&A with Asia Asset Management.

Why are asset owners increasing allocations to infrastructure?

Nick Langley: Asset owners are increasingly allocating more to infrastructure due to the asset class’s unique characteristics, which offers stability, income and diversification, particularly valuable in today’s volatile economic environment.

Infrastructure assets such as utilities, energy pipelines and transportation networks provide essential services with a more consistent demand profile, which translates into stable cash flows and lower volatility relative to traditional equities. Many of these assets have revenues linked to the growth in their asset base, often with inflation protection through regulatory frameworks or long-term contracts, helping to preserve real returns over time.

Furthermore, infrastructure tends to have a lower correlation with other asset classes, providing diversification benefits that enhance overall portfolio resilience, especially during periods of market stress.

There are two key reasons why investors are attracted to infrastructure, whether in public or private markets.

• Differentiated source of returns: Unlike general equities and property, the key driver of long-term returns for infrastructure investors is growth in the underlying asset base. Although mechanisms vary by region, regulators generally provide an allowed return with reference to the underlying asset base of these essential companies. If the regulator is providing steady allowed returns on a growing asset base, we would expect earnings to increase at broadly the same pace as the underlying asset growth.
• Inflation protection: Infrastructure assets are designed to provide long-term benefit for their communities and stakeholders and as a result, allowed returns are generally linked to inflation. This inflation “pass-through” mechanism allows prices paid by users of the asset to adjust periodically and ensures that the returns to equity investors funding these assets are not eroded over time due to the effects of inflation. Importantly, this inflation pass-through can take anywhere from three months to three years to hit the reported earnings depending on the type and location of the assets.

Nicholas Kuys: Infrastructure is a structural growth market. Huge investment is required across the energy, transportation, water, and communications sectors over the coming years due to historical underspending by governments, many of which have stretched balance sheets, especially post-Covid.

This has opened the door for private capital to play a leading role in financing this urgently required investment. In addition, infrastructure is typically less correlated to traditional asset classes, providing diversification benefits to portfolios.

Infrastructure assets also have attractive defensive characteristics such as long-term contracted revenues with inflation-linked escalators, providing greater certainty of underlying cash flows during uncertain economic periods.

Ultimately, the long-term outlook of institutions is ideally suited to the typical timeframe of infrastructure investments, whereby managers seek to implement multi-year value creation plans to transform assets.

What are the risks of investing in infrastructure?

Langley: Beyond broader macroeconomic factors, regulatory risk is one of the most significant considerations in infrastructure investing. As active managers, we assess this risk through detailed fundamental analysis and disciplined portfolio construction.

To mitigate this risk, we model key aspects of regulatory frameworks, including allowed returns, capital and operating expenditures. Our team also runs simulations to test a range of potential scenarios.

For companies where we hold significant positions, we also maintain ongoing dialogue with regulators and policymakers through regular meetings, participation in investor workshops, and engagement in policy consultations. This proactive approach helps ClearBridge anticipate changes, influence outcomes where possible, and protect investor value.

Kuys: Investing in infrastructure typically carries several risks, including political and regulatory changes, technological disruption and operational challenges, which can impact the profitability and project timelines of an investment. As with any asset class, the level of exposure to inflationary pressure can also vary from opportunity to opportunity.

Managers can mitigate these risks by identifying true infrastructure assets with characteristics such as limited exposure to gross domestic product, long-term offtake contracts with creditworthy counterparts, and projected high cash flow visibility.

Changes in underlying base rates and debt financing availability and pricing can impact valuations. Additionally, infrastructure investments often have significant upfront capex requirements with long payback periods. These risks are all common across different sub-sectors and are typically underwritten by a manager when investing into an infrastructure asset.

Would infrastructure assets be more protected from market volatility from US President Donald Trump’s so-called Liberation Day tariffs?

Langley: Investors in the infrastructure sector are generally more protected from market volatility, such as that triggered by events like Liberation Day. Infrastructure assets can broadly be classified into two key categories: regulated assets and user-pays assets. Each group exhibits different sensitivities to trade dynamics and tariff-related pressures.

Regulated assets include electricity, water and gas utilities that are typically domestically operated and governed by local regulatory frameworks. Because they provide essential services, they are largely insulated from international trade disruptions. Regulated assets may not only be shielded from tariffs but could also benefit under certain conditions.

User-pays infrastructure assets such as ports, toll roads, railways and pipelines facilitate the movement of goods both domestically and globally. These assets are inherently more sensitive to trade dynamics, and therefore more exposed to the effects of tariffs. However, as global trade routes evolve in response to shifting policies, it remains unclear which assets will ultimately benefit or face headwinds.

Kuys: The impact depends on the level of tariffs imposed at the time and the underlying asset. For example, a company that is reliant on cross-border trade and long supply chains to build projects, such as windfarms or data centres, is more likely to be impacted than a company that provides a software-based service to a particular market.

To a certain extent, if there is strong demand for a company’s services, such as that seen for data centre capacity, then it should be possible to pass some of the higher cost of future development projects to customers.

At Partners Group, our thematic investment approach, rigorous underwriting process, hands-on value creation plans and diversified strategy position us well to navigate broad macro challenges and mitigate risks for new investments and existing companies.

What’s your outlook for infrastructure assets?

Langley: We anticipate slowing global growth in 2025, though regional dynamics will vary. In the US, policy uncertainty, particularly under the Trump administration’s evolving agenda, has proven more disruptive than expected and may weigh on economic momentum.

Conversely, Europe may experience improving growth, supported by what appears to be a more constructive fiscal environment across the region.

Given this backdrop, we remain somewhat defensively positioned, with a tilt toward utilities, which we believe are currently undervalued. Despite rising interest rates compressing valuation multiples, utilities continue to demonstrate strong growth profiles, particularly in the US,] where demand is being fuelled by artificial intelligence data centres’ power needs, industrial decarbonisation, and grid resiliency investments.

Meanwhile, European utilities are gaining momentum as regulators are approving greater capital expenditures and allowing higher returns, which improves long-term earnings visibility.

We expect earnings across infrastructure and utilities to remain robust, even in a more uncertain macro environment. The resilience and earnings stability of infrastructure across economic cycles makes it an attractive allocation in what we expect to be a more volatile and unpredictable market.

Kuys: Allocations to infrastructure continue to grow at a healthy pace as investors seek exposure to the attractive characteristics of the asset class, including resilience, downside protection, essential service nature and structural growth. However, there is no ideal asset allocation level for infrastructure, as this depends on the individual requirements of the investor.