Infrastructure

2024 Outlook
Answering five tough questions
from infra-skeptics

Are valuation Hidden complexities

concerns overdone? of secular trends.
 Executive summary

Private infrastructure had a challenging 2023. Although performance remained relatively

stable, fundraising is at the weakest level in 10 years, while deal volumes have fallen 40%
year-on-year due to wide bid-ask spreads. High interest rates, mixed economic outlook,
and geopolitical tensions continue to weigh on the industry.

In our infrastructure outlook last year1, we were relatively cautious about the asset class
due to uncertainties in the macro environment. But with most of 2023 behind us, we now
wonder whether markets have actually become too bearish. Infra-skeptics often express
disbelief around infrastructure’s current valuations and performance, and suggest that it is
best to remain on the sidelines before the eventual correction.

Other skeptics also point to sector-specific issues, including concerns about the notable
secular tailwinds that we previously highlighted2. For example, on deglobalization, they
question whether onshoring is actually real, since global trade volumes are still rising. On
digitalization, cynics are wary of the hype around artificial intelligence (AI), especially since
digital infrastructure has seen a pullback in investor expectations. On decarbonization,
they worry about the backlash against clean energy, given the growing number of
negative headlines about anti-renewable policies and project cost inflation.

In our view, some of these questions are valid, but the negative sentiment also appears
overdone. The evolution and development of private infrastructure has never been a
straight line. Looking into 2024, we see silver linings for the asset class.

1 Infrastructure Outlook – Lessons learned for 2023; November 2022 Link

2 Infrastructure Investing – The myths and realities; July 2023 Link

Page 2 of 16
 Macro backdrop
How 2023 played out compared to our expectations

This is the sixth edition of our infrastructure outlook. In
past editions, we highlighted important trends and
tailwinds experienced by an asset class that had seen
almost uninterrupted growth for a decade, even during the
height of the global pandemic in 2020.
But last year, cracks began to emerge. With higher rates
and rising market volatility, we flagged in our previous
outlook that investors were underestimating risks around
fundraising, valuations and political uncertainty, and also
highlighted the importance of fundamentals and active
asset management as mitigants.
Private infrastructure deal volumes have fallen across all
geographies in 2023, as buyers and sellers remain
extremely cautious (see Figure 2). Even though the industry
has over USD 300 billion of dry powder, buyers are hoping
to find bargains yet sellers are unwilling to part with assets
at significant discounts, leading to wide bid-ask spreads.
Interestingly, North America deal volumes have exceeded
European deal volumes for the first time in history – a
reflection of how the asset class in the US is catching up to
Europe in terms of maturity.

Some of these concerns turned out to be well founded. Figure 2: Private infrastructure deals closed
After record fundraising in 2022, the industry saw the (USD billions)
weakest fundraising environment in 10 years with USD 50
billion raised year-to-date (see Figure 1). 500

400
Figure 1: Private infrastructure fundraising
(USD billions, no. of funds)
300
250 200

200
200 160
100

150 120
0
2021
2013

2014

2015

2016

2017

2018

2019

2020

2022

2023 YTD

100 80

North America Europe Others

50 40 Source: Inframation, November 2023.

Preqin’s recent investor survey showed that investors still

0 0 remain focused on interest rates (see Figure 3). Since
2020
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

2021
2022
2023 YTD

infrastructure assets tend to be highly levered, investment

Capital raised (USD bn) - LHS
Source: Preqin, November 2023.
performance can be sensitive to interest rates if the asset
does not have strong cost passthrough. Asset valuations
and the competition for assets are the second and third
No. of funds - RHS
main concerns for investors.

Page 3 of 16
Figure 3: Private infrastructure investor survey – key Infrastructure investors tend to have long term investment
challenges for returns in the next 12 months horizons, and their investments also have long asset lives,
(% of respondents) which means it is more important to focus on long term
macro trends, rather than fixating on short term volatility.
70%
70
Forward inflation expectations implied by the swap markets
60
60% have actually been relatively stable despite the recent
uptick (see Figure 5). This is a sign that long-term interest
50
50%
rate impact on infrastructure assets may be limited despite
the near term volatility.
40
40%

30
30%
Figure 5: 5-year forward inflation expectations (%)

20 5
20%

10
10% 4

0
0%
Rising Asset Competition Regulation Geopolitical 3
interest rates valuations for assets landscape

Jun-20 Jun-21 Jun-22 Jun-23 2

Source: Preqin, August 2023.

1
Looking on the bright side, as inflationary pressures
continue to subside, central banks will have more room to
start cutting interest rates. Consensus estimates expect 0
10-year bond yields in some markets to begin declining in

Oct-23
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Oct-21
Oct-22
2024 (see Figure 4), which should bring some relief to
those concerned about high financing costs.
USD EUR GBP

Figure 4: 10-year government bond yields (%) Note: Reflects the 5-year average inflation beginning 5 years from now.
Source: Bloomberg, November 2023.

5
The infrastructure sector continues to benefit from secular
tailwinds such as the 4 Ds – decarbonization, digitalization,
4
deglobalization, and demographic change. As we move
beyond the inflation and interest rate shock in 2022-23,
3
market expectations will reset, and we are cautiously
optimistic that deal activity will pick up, especially since the
2
long term investment themes remain intact.

1
In addition, global listed equities are up 15% YTD in 2023,
which would lessen the impact of the “denominator
0
effect”3 that has plagued fundraising this year, as the
hands are tied for many investors.
-1
2016

2017

2018

2019

2020

2021

2022

2023E

2024E

2025E

In the following sections of this report, we will explore 5

popular questions that infra-skeptics have raised this past
USA Europe UK year. The questions are centered on the overall valuations
and performance of the asset class, as well as concerns
Source: Bloomberg, November 2023. about specific sectors.

At the end of this paper, we highlight other interesting

developments across both infrastructure equity and
3 Weak public markets in 2022 indirectly increased infrastructure debt markets.
the share of private assets in investors’ portfolios,
thereby limiting their ability to allocate more capital
to private markets in 2023

Page 4 of 16
 Valuations
Is infrastructure’s resilience too good to be true?

Private infrastructure equity was up ~10% in 2022, and is
currently up ~4% in 1H23, according to both MSCI and
Burgiss. However, the resilient performance has only
attracted some skepticism around valuations.
Critics argue that under the current interest rate pressures,
infrastructure discount rates should also adjust upward,
which means valuations should come down. Yet recent
performance remains positive, and the asset class has not
seen widespread write-downs.
Base rates are only one part of the discount rate equation.
The other piece is the equity risk premium4. Using public
markets as a proxy, implied equity risk premiums have
actually trended lower even in public markets, according to
UBS Global Research’s fundamental analytics team (see
Figure 7). This helps lower an all-in cost of equity despite
rate hikes.
Figure 7: Public markets equity risk premium (%)

In our view, investors are currently too focused on the 12

dramatic increase in the front end of the yield curve. For
example, they often point out that 12-month US treasury
10
yields have widened by 500bps.
8
However, infrastructure assets are long-term investments,
with stable cash flows, and useful lives of 20 years or more.
6
This means longer-term rates are more relevant to
Infrastructure assets as a gauge on cost of capital, and
4
these term rates have not increased as dramatically as
short-term rates (see Figure 6).
2

0
Figure 6: Change in government bond yields since
Jul-19
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Jul-18
Nov-18

Nov-19

Jul-20
Nov-20

Jul-21
Nov-21

Jul-22
Nov-22
December 2021 (bps)

600
Europe United States
500
Source: UBS IB Fundamental Analytics research, September 2023.

400 A natural question is, why have public market equity risk
premiums declined? The answer generally revolves around
300 low earnings volatility, markets stability and general
strength of underlying fundamentals – factors that would
resonate with infrastructure investors.
200

Skeptics may argue that the decline in public market equity

100 risk premiums are not warranted, but that debate is
beyond the scope of this report. We are simply highlighting
0 what is currently being priced into public markets, and
1-year 10-year 20-year 30-year 1-year 10-year 20-year 30-year using that as a read across for private infrastructure.
US Europe

Source: MSCI, November 2023. 4 Cost of equity = risk free rate + equity risk premium

Page 5 of 16
Figure 8: Public infrastructure investment trust Figure 9: Listed infrastructure revenue forecasts
reported discount rates (%) (indexed to 2019)

12.0
12 160

11
11.0
140
10
10.0

9
9.0 120
8.0
8

7
7.0 100

6
6.0
80
5
5.0

4
4.0 60
2015 2016 2017 2018 2019 2020 2021 2022 1H23 2019 2020 2021 2022 2023E 2024E 2025E

3IN HICL BBGI Previous est. (9/21)

TINC INPP GCP Current est. (9/23)

Source: Company reports, UBS Asset Management, Real Estate & Private Source: Bloomberg, UBS Asset Management, Real Estate & Private Markets
Markets (REPM), November 2023. (REPM), September 2023.

Overall, given long term rates have increased by ~300bps (see Figure 6) and equity risk
premiums have declined by about ~200bps (see Figure 7), we would expect ~100bps increase
in cost of equity.

This is consistent with what we can observe in the markets. Although private infrastructure
funds typically do not disclose their hurdle rates, discount rates published by listed
infrastructure investment trusts5 have only increased by ~50-100bps since 2021 (see Figure 8).
Regulations require these investment trusts disclose their discount rates, which they use to
calculate Net Asset Values (NAVs) in their period financial statements.

Higher discount When looking at asset valuations, discount rates only tell one part of the story. The other part
rates do not impact are free cash flows, and that is where infrastructure has shined. Infrastructure fundamentals
valuations much remain healthy, due to robust post-pandemic recovery, strong inflation passthrough, policy
when the support, and the fact that most infrastructure investments are unique assets that provide
underlying assets essential services and have pricing power.
are also making
more money. Looking at the consensus estimates of over 100 listed infrastructure companies as proxy,
2023-2025 revenue estimates have been revised upward by an average of ~15% in the last
two years (see Figure 9). Higher discount rates do not impact valuations much when the
underlying assets are also making more money.

However, every investment is different, and it is important to go back to basic business

fundamentals; this means focusing on barriers-to-entry, pricing power, growth plans, capital
structures, and management teams. Active asset management also increases the resiliency of
infrastructure assets, as operational and financial levers can be adjusted under different
economic environments to maximize value.

5 Public infrastructure investment trusts are typically listed in

the UK, and invest in similar assets as private infrastructure
funds; their published discount rates are therefore good
proxies for private infrastructure

Page 6 of 16
 Market timing
Should we wait for the correction to buy the dip?

Private infrastructure performed remarkably well in 2022, up 10% while global listed equities were
down 20%. In 1H23, private infrastructure was up 4%, while global equities have seen a strong
15% rebound. In some ways, infrastructure became a victim of its own success, as its stable
performance has also attracted some disbelief.

… not having Given there is already a lot of skepticism around private infrastructure valuations, as discussed in the
to worry about previous section, some investors are waiting by the sidelines hoping for a better entry point. They
market timing is look at the large drawdown and rebound in listed equities in the last 2 years as an example of how
an underrated profitable it is to get the timing right.
feature of
infrastructure We have also seen other non-infrastructure strategies pointing to recent drawdowns as unique
buying opportunities for their asset classes. As much as there is some marketing appeal in pitching
the same story about infrastructure, that is simply not the point of investing in the asset class. One of
the main value propositions of private infrastructure is that it has historically displayed low volatility
and low correlations compared to other asset classes.

Looking at recent data, we have not seen any major drawdowns in private infrastructure, even
though public equities were highly volatile during the same period (see Figure 10). This means that
compared to public markets, the upside of getting the timing right is limited, while the downside of
getting the timing wrong is also muted.

We believe that not having to worry about market timing is an underrated feature of infrastructure –
considering market timing is notoriously difficult even in other asset classes.

Figure 10: Private infrastructure performance vs. global listed equities (Indexed to 2015)

250

200

150

100

50
2Q16

1Q17
4Q15
1Q16

3Q16
4Q16

2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
2Q23

Public equities Private infrasturcture

Source: MSCI, Bloomberg, November 2023. Past performance is not a guarantee for future results.

Page 7 of 16
 Deglobalization
If this is real, why are trade volumes still rising?

Earlier this year, we highlighted “deglobalization” as an
important megatrend that will support private
infrastructure investments (Link). However, some skeptics
are pushing back on this argument, since trade volumes
are growing in 2023 and is expected to further accelerate
in 2024 according to World Trade Organization latest
estimates in October 2023 (see Figure 11).
The macro data is beginning to reflect this trend. US
construction spending for manufacturing reached a record
high of over USD 100 billion in 2022, after being stagnant
for six years. In the first nine months of 2023,
manufacturing investments have already reached USD 140
billion, a 70% YoY increase and accounting for 18% of
total construction (see Figure 12).

Figure 11: Volume of world merchandise trade, Figure 12: US construction spending in manufacturing
4Q15- 4Q24e (USD billion) and share of total non-res spending (USD billion)

130 160 20

140 18
16
120 120
14
100 12

110 80 10

60 8
6
100 40
4
20 2
0 0
90
3Q23 YTD
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

80
Construction spending on manufacturing - LHS
4Q15
2Q16
4Q16
2Q17
4Q17
2Q18
4Q18
2Q19
4Q19
2Q20
4Q20
2Q21
4Q21
2Q22
4Q22
2Q23
4Q23e
2Q24e
4Q24e

% of total non-res construction - RHS

Source: World Trade Organization, October 2023. Source: US Census Bureau, October 2023.

However, 2023 world trade volumes are expected to only
grow by 0.8%, compared to the earlier estimates of 1.7%
in April 2023, and original estimates of 3.4% forecasted in
April 2022. The WTO also said that the share of
intermediate goods in world trade is trending lower,
suggesting further fragmentation of the supply chain.
Deglobalization used to carry a negative connotation
within the business community, but this is no longer the
case. Onshoring of manufacturing capacity and increased
focus on energy security will require significant
investments. Many of the new facilities are also located in
previously overlooked rural areas, thus opening up new
markets for infrastructure investors.
Government policies have a big role to play here. The US
Inflation Reduction Act (IRA) and the Creating Helpful
Incentives to Produce Semiconductors (CHIPS) Act have
incentivized the build out of the domestic clean energy and
semiconductor plants.
Many large corporates across the technology and industrial
sectors have already announced multi-billion-dollar
manufacturing facilities in the US in the last two years
(see Figure 13). The list below is by no means
comprehensive, as the US government is tracking almost
USD 500 billion of private sector manufacturing
investments.

Page 8 of 16
 Figure 13: New US manufacturing projects announced since 2021

Company Location Investment (USD billion)

TSMC Phoenix, AZ 40.0

Texas Instruments Sherman, TX 30.0
Intel Chandler, AZ 20.0
IBM Hudson Valley, NY 20.0
Micron Clay, NY 20.0
Intel Licking County, OH 20.0
… this will be a Samsung Taylor, TX 17.0
greener form of Micron Boise, ID 15.0
industrialization, as Texas Instruments Lehi, UT 11.0
new manufacturing
facilities will source Hyundai Motors, LG Pembroke, GA 7.6
cleaner energy and Stellantis, Samsung Kokomo, IN 6.3
focus on efficiency Nacero Penwell, TX 6.0
and sustainability
HIF Global Matargorda, TX 6.0
Ford, SK Innovation Glendale, KY 5.8
LG Energy Queen Creek, AZ 5.6
Ford, SK Innovation Stanton, TN 5.6
Rivian Madison, GA 5.0
Hyundai Motors, SK Bartow County, GA 5.0
Wolfspeed Pittsboro, NC 5.0
Pier Wind Long Beach, CA 4.7
Air Products Ascension Parish, LA 4.5
Applied Materials Sunnyvale, CA 4.0
Panasonic Energy De Soto, KS 4.0
GM Orion Township, MI 4.0
VinFast Chatham, NC 4.0
Source: White House, Press Releases, UBS Asset Management, Real Estate & Private Markets (REPM), November 2023.

This is not just a US phenomenon. Europe is tracking over USD 200 billion of electric vehicle
and battery manufacturing investments, and over USD 100 billion of semiconductor
investments. Maros Sefcovic, who is leading the efforts behind the EU green deal, recently said
that the EU will take on a more assertive approach in promoting “made in Europe” green
industries , as a response to the pro-manufacturing policies set out by the US IRA.

One issue that is often associated with reshoring is the environmental impact, as the word
“industrialization” may evoke the image of smoke, soot, and grime of the Victorian era.
However, we believe that this will be a greener form of industrialization, as new manufacturing
facilities will source cleaner energy, focus on efficiency and sustainability.

Most of the large corporations highlighted in Figure 13 that have also made net zero
commitments. For example, Intel, which is looking to invest over USD 100 billion in chip-
making plants, has pledged to achieve net zero in its operations by 2040. TSMC, another major
chip maker, has committed to reaching net zero emissions by 2050.

Reshoring accelerates the economic and population growth across previously overlooked areas.
Large tech companies simply will not commit billions of dollars to build a new plant, without
certainty around energy supply, transportation networks, utility services, and high-speed
internet. These tailwinds support infrastructure investments across all sectors.

Page 9 of 16
 Digitalization
Is AI just another fad for digital infrastructure?

The COVID-19 pandemic highlighted the importance of Some investors immediately became skeptical about the
digital infrastructure, as high speed internet became hype, which in this case, we were sympathetic to at first,
essential with the accelerated adoption of remote work since digital infrastructure investors have seen similar
and education, and the popularization of high-definition stories play out before.
video conferencing. Digital infrastructure deal volumes set
a high-water mark of almost USD 200 billion in 2022. For example, 2 years ago, cryptocurrency was supposed to
accelerate data center investments due to crypto miners’
Since then, deal volumes have declined significantly. Just as unsatiable demand. Some of those projects have since
public market investors began scrutinizing growth-oriented been abandoned. The metaverse was also supposed to
technology stocks, private infrastructure investors have also drive the adoption of decentralized “edge” data centers
become cautious about digital infrastructure investments, and internet-of-things (IoT). That also has not happened.
especially those that were underwritten using overly
optimistic debt-fueled growth assumptions. At the same time, investors should not be too dismissive of
this opportunity, and take a more balanced approach.
The hype around ChatGPT and generative AI earlier in Unlike crypto mining, AI is championed by large and
2023 brought a sudden jolt of energy to the sector. credible hyperscale companies, who are also some of the
Publicly traded data center companies such as Digital Realty most important data center customers. They will therefore
(DLR) and Equinix (EQIX) have seen their stocks increase by take the lead in determining whether new infrastructure
20% this past year, after experiencing severe declines of up investments are actually needed or not. Based on estimates
to 50% from their peaks in 2021 (see Figure 14). from various sources, the total spend on AI and AI related
infrastructure could be enormous (see Figure 15).

Figure 14: EQIX and DLR stock performances Figure 15: AI and data center investment forecast
(Indexed to 2019) (USD billions)

160 Data center capex

by 2027 (Dell'Oro)

140
Global spending
for AI by 2026 (IDC)
120
Data center capex
by 2027 (Omdia)
100
Data center upgrades
for AI (Nvidia)
80

AI investment forecast
by 2025 (GS)
60
Jun-21
Dec-19

Jun-20

Dec-20

Dec-21

Jun-22

Dec-22

Jun-23
Sep-20

Sep-21

Sep-22

Sep-23
Mar-20

Mar-21

Mar-22

Mar-23

AI infrastructure TAM
by 2026 (Equinix)

DLR EQIX 0 200 400 600

Source : NASDAQ, November 2023. Past performance is not a Note: Dell’Oro revised forecast upward by USD 100bn in July 2023
guarantee for future results. Source: Dell’Oro Group, IDC, Omdia, Nvidia, Goldman Sachs, Company
reports, January 2023.

Page 10 of 16
 Within digital infrastructure, AI will therefore benefit hyperscale data centers the most. The
opportunity for colocation data centers is less obvious, as hyperscalers are driving the adoption
of generative AI, although this can change in the future.

… sophisticated Despite many large numbers being thrown around, the actual infrastructure investment
investors can still opportunity will likely be in the tens of billions, as pointed out by Equinix (see Figure 15) and
find opportunities as McKinsey (see Figure 16). Keep in mind that enterprise spending such as software and
long as they can equipment (servers, routers etc.) are often lumped into AI investment estimates, even though
separate commercial are typically spent by customers, rather than by the infrastructure provider.
behavior from hype,
and focus on The impact on other digital infrastructure assets such as fiber, towers and small cells will be
infrastructure longer term, as current AI learning models can be trained at data centers in remote locations
characteristics without the need for high connectivity or low latency (akin to sending your child to a remote
university to avoid distractions).

Technologically, AI-focused data centers use GPU chips that consume up to 4x more electricity
per rack than traditional data centers that use CPUs, which raises concerns about carbon
emissions. This requires a rethink of data center design, including the incorporation of cheap
and cleaner energy sources, and the use of advanced cooling equipment (e.g. liquid cooling).
Obsolescence therefore becomes a bigger risk for AI-focused data centers, especially if new
equipment or chip designs6 emerge.

Geographically, since AI training does not require much fiber connectivity, data centers beyond
traditional markets such as Northern Virginia and FLAPD (Frankfurt, London, Amsterdam, Paris
and Dublin) with access to cheap renewable electricity will become more attractive (e.g. Texas
or the Nordics). This trend is already evident based on the recent investment announcements,
as none of these projects are located in traditional data center markets (see Figure 17).

Although it is good to have a healthy amount of skepticism, sophisticated investors can still find
opportunities as long as they can separate commercial behavior from hype, and focus on
infrastructure characteristics. This includes having high quality counterparties, long-term
contracts, access to clean energy, minimal technology risk, and avoiding speculative capex.

Figure 16: Global data center construction capex excl. Figure 17: Recent data center capex announcements
equipment and enterprise spend (USD billions)
Date Company Location Capex
60 (USD bn)

50
Wisconsin,
Nov-23 Microsoft 1.0+
40
USA

30 Oct-23 Microsoft Australia 3.2

20
Aug-23 Google Ohio, USA 1.7
10

0 Coreweave /
Jul-23 Texas, USA 1.6
Nvidia
2022

2023E

2024E

2025E

2026E

2027E

2028E

2029E

2030E

South
QTS /
Colocation Hyperscale Jul-23 Carolina, 8.0
Blackstone
USA et al.
Note: Excludes enterprise spending and non-construction spending (i.e.
equipment). Source: McKinsey, January 2023. Jun-23 Microsoft Finland n/a

Source: Company reports, press releases, November 2023.

6 For example, Google is developing TPU

chips that are designed for AI and could be
significantly more energy efficient and cost
effective

Page 11 of 16
 Decarbonization
Are we underestimating the clean energy backlash?
Clean energy is a staple investment across the portfolios of
many infrastructure funds. The industry benefits from
technological improvements, political support, and stable
economics. There are also emerging decarbonization
investments beyond renewables, especially in sectors such
as industrial, transport and buildings, which we highlighted
in a recent white paper7.
The decarbonization investment theme receives widespread
support. However, we are seeing more negative headlines
this past year about the pushback against green energy.
Most renewable investors and developers remain unfazed
based on a recent industry survey (see Figure 18). But
skeptics are questioning whether we are underestimating
the risk from the backlash.
Figure 18: Impact of anti-ESG political actions on
plans in the U.S. renewables sector (survey)
80
70
60
50
40
30
20
10
0 trend. In addition, there are some powerful mitigants that
Not at all Slightly Moderately Significantly
Investors Developers
Source: American Council on Renewable Energy, June 2023
Some of these fears are understandable since 2024 is an
important election year in the US and Europe (followed by
the UK in early 2025). For example, Former President
Donald Trump has already vowed to repeal the IRA if he is
elected again, despite the IRA mainly benefitting more
conservative “red states”. Similar rhetoric will almost
certainly increase in the next few months.
7 Future green investments - Emerging energy
transition infrastructure beyond renewables;
October 2023 Link
Local politics are also becoming more contentious.
Recently, voters in Texas approved the establishment of a
USD 10 billion Texas Energy Fund that subsidizes new gas-
fired power stations, eroding the project economics of
renewables. Earlier in May, state politicians also attempted
to pass a bill that imposes (ironically) more stringent
environmental permitting rules on wind and solar projects.
This backlash is also happening in progressive “blue
states”. There are grassroot protests against offshore wind
projects in New Jersey and Maryland citing issues such as
ecological impact and visual pollution. High profile cost
overruns and project cancellations also add to the public
distrust, as they validate negative preconceived notions.
Europe is not immune to these negative headlines either,
especially on the back of a cost of living crisis and
renewable project cost inflation. In the UK, Prime Minister
Rishi Sunak announced in September 2023 that he plans to
roll back the UK’s climate commitments. Germany and Italy
are also pushing back on energy efficiency initiatives.
In our view, investors need to focus on the big picture. The
evolution of clean energy has never been linear, and we
have always faced various uncertainties. Despite the recent
headlines, IEA forecasts USD 1.7 trillion of global green
energy investments in 2023. In many markets, renewables
are still cheaper than other traditional forms of electricity
generation. Like any industry, it is up to managers to
separate the good investments from the bad ones.
We therefore remain optimistic on the decarbonization
offsets some of these headline risks:
− Industry adaptability: The clean energy industry has
shown remarkable resilience this past decade,
adapting to changing regulations and other
unforeseen challenges with technological innovation,
creative financing solutions, new market expansion,
and supply chain diversification.
− Underwriting assumptions: An investment is only as
risky as the accuracy (or inaccuracy) of the underlying
underwriting assumptions. Policy and project execution
risks can be mitigated by conservative forecasting,
especially around variables that are dependent on
government support (e.g. subsidy amounts, contract
renewals, state-sponsored clean energy credit prices).
Page 12 of 16
− Corporate support: Corporate demand is also a
strong driver of green investments. Many large
corporations with aggressive net zero targets are
willing to pay a premium to obtain clean attributes,
offsetting some policy uncertainties. For example, they
can provide offtake contracts to support different
types of decarbonization projects, from traditional
renewables to emerging fuels like hydrogen.
− Public support: Clean energy still receives widespread
support around the world (see Figure 19 and Figure
20). As highlighted by responses in the US survey,
there may be speed bumps here and there, but the
likelihood of a complete U-turn on clean energy policy
is unlikely. In addition, legislations like the US IRA and
the EU Green Deal have been around long enough
that local populations should already be seeing the
benefits from new investments. This makes further
community outreach and political advocacy easier.

Figure 19: Eurobarometer energy transition survey

(% of respondents)

… there may be EU should invest massively in renewable energy

speed bumps here
and there, but the EU should increase energy efficiency of buildings,
likelihood of a transport
complete U-turn
on clean energy EU should reduce dependency on Russian energy
policy is unlikely.
Reducing oil and gas and increasing renewables is
important for overall security

Renewables will lower energy prices in the long term

0 20 40 60

Totally agree Tend to agree tend to disagree totally disagree

Source: European Commission, July 2023

Figure 20: US Pew Research Center survey on climate change-related issues

(% of respondents)

Support US's participation in global efforts to reduce

impact of climate change

Tax corporations based on their CO2 emissions

Positives

Prioritize alternative energy sources over fossil fuel

Require power plants to eliminate CO2 by 2040

There will be unexpected problems from the energy

transition
Require new buildings to run on electricity with no
Negatives

gas lines

Phase out production of gasoline vehicles by 2035

Phase out fossil fuels completely

0 20 40 60 80

Source: Pew Research, June 2023

Page 13 of 16
 Market update
A review of infrastructure equity and debt markets in 2023

In this section we highlight other interesting developments Figure 22: Investors' expected capital commitments to
within infrastructure equity and debt markets in 2023 that private infrastructure in next 12 months
we have not touched on, including sentiment, fundraising,
deal flows, and valuations. 100
100%

Infrastructure equity 80
80%
Infrastructure performance has been relatively stable this
60%
60
past decade. Performance in 1H23 was up 4%, or 8% on
an annualized basis (see Figure 21). Although this would 40
40%
make 2023 the third weakest annual performance since
2009, in the grand scheme of things, it is relatively 20
20%
humdrum compared to the negative sentiment out there.
0
0%

Aug-23
Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Figure 21: Infrastructure performance
(gross total return %, local currency)
More Capital Same Less Capital
20
20.0
Source: Preqin, August 2023.

15
15.0 Private infrastructure valuations have been relatively stable
compared to public markets (see Figure 23). Based on
EDHEC’s estimates, median valuation multiples for private
10
10.0 infrastructure have actually been on a slight downtrend,
although the decline is not as dramatic as what we
5
5.0
observed in the public markets.

0
0.0 Figure 23: Private infrastructure valuations
(EV/EBITDA multiples)
-5.0
-5 18
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023E

16

14
Income Capital
12
Source: MSCI Global Private Infrastructure Index, October 2023
Note: 2023E based on annualized 1H23 data. Past performance is not a 10
guarantee for future results.
8
Preqin’s 2H23 investor outlook published in August also
6
showed that 41% of investors surveyed are looking to
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Sep-21
Sep-22
Sep-23

commit more capital to private infrastructure in the next

12 months, a slight improvement from the 35% in the
1H23 survey published in March (see Figure 22). A sign
Private infra (median) Private infra (mean)
that fundraising could improve in 2024.
MSCI World

Source: Bloomberg, EDHEC, UBS Asset Management, Real Estate & Private
Markets (REPM), September 2023.

Page 14 of 16
Infrastructure debt Figure 25: Spreads on private infrastructure debt
Compared to infrastructure equity, the sentiment for (basis points)
infrastructure debt has been more positive. Rising base
rates and spreads increased the relative attractiveness of 600
infrastructure debt especially compared to more core
infrastructure equity strategies on risk-adjusted returns. 500

This can be seen in fundraising activities – although the 400

absolute dollar amount raised for infrastructure debt in
2023 is almost flat versus 2022, infrastructure debt 300
accounted for almost 30% of all infrastructure funds
raised, a historical high (see Figure 24). This is not 200
surprising, given Infrastructure Investor’s LP Perspectives
Study from the beginning of the year already highlighted 100
infrastructure debt as the most in-demand infrastructure
strategy. 0

May-23
Jun-20

Dec-22
Aug-19

Jan-20
Mar-19

Apr-21

Sep-21

Feb-22

Jul-22

Oct-23
Nov-20
Figure 24: Infrastructure debt fundraising
Europe IG corp (BBB)
25 35% Europe HY corp (BB)
Europe infra debt
30%
20
Source: Bloomberg; EDHEC Debt Indices (Europe); UBS Asset Management,
25% Real Estate & Private Markets (REPM), November 2023.
15 20%
Looking into 2024, as inflation and interest rates have
15% stabilized, we could potentially see a recovery in lending
10
activity, especially for borrowers who have delayed their
10% financing plans. As previously discussed, infrastructure
5 fundamentals remain strong, which means transaction
5%
volumes should pick up now that risks from this new
0 0% normal is better understood.
2023 YTD
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

Figure 26: European infrastructure debt (USD billions)

Capital raised (USD bn) - LHS
Infra debt as % of total infra fundraising - RHS 300 1800

Source: Inframation, November 2023. 250 1500

Public market spreads for European BBB and high yield 200 1200
non-financial credit have been relatively flat from the end
of December after declining throughout most of 2022. 150 900
Since private market spreads adjust to reflect public
markets with a lag, we have seen a 60bps decline in infra
100 600
debt spreads (see Figure 25), following the trends set by
public markets 6-9 months prior.
50 300

Similar to 2022, the higher cost of debt continues to

0 0
impact transaction volumes (see Figure 26) as more
2013

2016

2023 YTD
2014

2015

2017

2018

2019

2020

2021

2022

borrowers reduce their financing needs. Sponsors can no

longer rely on cheap debt to fuel aggressive growth plans,
and are adjusting their capex to adapt to this new reality. Loan Debt (USD bn) - LHS

Despite weaker volumes, activity was particularly strong in Capital Market Debt (USD bn) - LHS
the energy transition and telecommunication sectors, as Deal volume - RHS
investments exposed to secular trends such as
decarbonization and digitalization still remain popular. Source: Inframation, November 2023.

Page 15 of 16
For more information, please contact:
UBS Asset Management
Real Estate & Private Markets (REPM)
Research & Strategy – Infrastructure
Alex Leung
+1-212-821 6315
alex-za.leung@ubs.com
Follow us on UBS Asset Management
To visit our research platform, scan me!
www.ubs.com/infrastructure
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