Investors may have been cautious about investing in infrastructure in 2023, leading to a slowdown in deals and fundraising, but the outlook is improving. Private infrastructure investing’s reasonably robust performance over the last few years appears set to continue, with limited partners (LPs) preparing to increase their investments to the asset class.

While the private equity industry experienced a brief post-COVID boom, the subsequent challenges have led to a more subdued environment characterized by fundraising headwinds, deal flow constraints, and exit challenges.

Private equity firms are navigating these challenges by focusing on value creation, strategic partnerships, and targeted investment strategies to capitalize on opportunities in a volatile market landscape.

Against this backdrop, LPs expect to increase their commitments to private infrastructure by more than $600 billion by 2027, according to data from Boston Consulting Group.

“There is a pressing need worldwide for new and revitalized infrastructure, and private investors will have a key role to play, explained BCG managing director and senior partner Wilhelm Schmundt.

“It has been a challenging year, but we expect the outlook for private infrastructure investment to strengthen, driven by an ongoing adjustment of transaction prices and an increasing need to return money to investors in an economic environment where high levels of dry powder await deployment.”

While the asset class, like many others, has seen risk premia fall, valuations have remained relatively steady, supported by the vital nature of these services, predictable cashflows, and explicit and implicit inflation pass-through qualities.

JP Morgan anticipates that possibilities will be driven by the scale of investment required for the energy transition, closed-end funds searching for exit options, and corporations seeking more cash outside of public markets.

“Core infrastructure should continue to benefit from strong structural tailwinds around the need to modernize, replace and decarbonize existing assets,” wrote the authors of the asset management arm in its 2024 Alternatives Outlook: Navigating a Shifting Investment Landscape

The most active deal-making sectors are energy and the environment, transport and logistics, and digital infrastructure, with social infrastructure also witnessing increased investor interest, noted BCG.

From 2018 to 2023, the aggregate deal value of private investment in the energy and environment sector, which is benefiting greatly from the global decarbonization theme, was $1.1 trillion, accounting for about 45% of all private infrastructure aggregate deal value.

The majority of privately held assets in the industry are focused on renewables and energy services. Europe has the greatest share of assets, closely followed by North America.

Private investment in the transport and logistics sector totaled almost $510 billion between 2018 and 2023, accounting for around 20% of all private infrastructure investment during that period, noted BCG. The majority of privately held assets in this sector are tied to railroad, air, and sea transportation projects.

Over the last five years, digital infrastructure investment has totaled approximately $420 billion, accounting for nearly 20% of total private infrastructure expenditure.

In 2023, most of this sector’s activity in Europe concentrated on privately held data-center assets, while most in North America were in mobile data and end-user services.

BCG said leading funds in the sector will follow a clear playbook, with a focus on the full investment cycle and strong assessment of all value creation levers. “All too often, funds restrict their operational value creation efforts to extrapolating sell-side plans or devising plans that cover only the first 100 days after closing a deal.”

“In contrast, leaders begin planning at the due diligence stage, developing and quantifying a clear hypothesis on how to improve operational performance throughout the ownership cycle to serve as a foundation for their efforts.”

BCG managing director and partner Alex Wright, who co-authored the report, said, “Infrastructure investing has been put to the test by recent macroeconomic uncertainty, but the path to value creation is clear. Clear levers for value creation are available in most portfolio companies, and having the right capabilities as well as a well-structured and thoughtfully executed plan is key.”