Unlisted Infrastructure
What the world needs now
Introducing a new frontier in infrastructure investing: Renewable energy, digital and social.
Looking beyond traditional infrastructure asset classes for returns.
When an investor thinks of infrastructure, airports, toll roads, and powerplants traditionally spring to mind. Projects like these have defined infrastructure investing for decades, producing low-yet-reliable yields. However, the landscape and opportunity-set for infrastructure investing are changing.
What the world needed in prior decades is not the same as today. There are new frontiers of infrastructure requiring substantial capital that are creating opportunities with potentially attractive returns.
We identify particularly exciting investment assets in renewables, digital, and social.
Renewable energy
We see renewable energy infrastructure as a huge investment opportunity. While some consider the sector to be overly saturated due to its prominence in media, the sheer magnitude of capital required to facilitate the energy transition means we are still only scratching the surface.
McKinsey estimates that to achieve existing net zero commitments by 2050 will require $3.5 trillion in capital expenditure each year beyond current levels. Private capital will be crucial to bridging this gap.1
Listen to our portfolio manager, Michael Steingold, on the new era of renewable infrastructure investing.
One area we see ample opportunities is in the energy transition.
We’re investing across the landscape of energy transition, not only in renewable energy generation itself (e.g. solar panels and windmills), but also the grid enhancements which enable renewable energy, the batteries, and hydrogen which allow us to store zero-carbon energy and undertake the electrification of homes, transportation, and industry.
The next wave of the energy transition, in our view, will be the industrial decarbonisation.
Industries with energy-intensive processes need to reduce their carbon footprint but often need more power than electrification can provide. We’ve invested in a company in the UK which does just that; working with companies to create custom solutions to use green hydrogen created from renewable energy to power manufacturing processes.
Around the world, governments and regulators are supporting the energy transition. Legislative initiatives like the U.S. Inflation Reduction Act and the EU's Net-Zero Industry Act, are adding further tailwinds for investment.
Case study
U.K. solar farm
Here's an example of a renewable investment opportunity we find appealing: a solar farm located in the UK.
This solar farm operates under a Power Purchase Agreement (PPA) extending until 2035, stipulating that all the energy generated is sold to a well-known global restaurant chain under contract.
This arrangement provides a stable and low-risk investment avenue, with an indicative Internal Rate of Return (IRR) ranging from 6 to 8%.
Additionally, its advantageous proximity to London and in-place grid connection means the investment may have attractive redevelopment potential after the PPA.
Operating solar in Reading, UK
Solar pv plant
Located along the M4
Our investment thesis
Lowest levelised cost of energy source
Fully contracted offtake until 2035
Future upside in value from the grid connection
Source: Confidential manager, Russell Investments. For illustrative purposes only. Information as of June 2023. Internal Rate of Return (IRR) can overestimate the potential returns of a project or future investment by making the Net Present Value (NPV) equal to zero. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.
Digital
What the world needs now is future-focused infrastructure to support the modern ways we live and work. There is no better example of that than the digital sector.
Digital infrastructure is the backbone of modern communications; it’s the ecosystem of data centres, fibre, mobile towers, and wireless spectrum that together form the internet. The digital realm – only a few years ago still considered a consumer-oriented product – has become an essential cornerstone of the global economy.
Listen to our portfolio manager, Michael Steingold, on the range of investible opportunities digital infrastructure presents to investors.
The digital realm
Only a few years ago still considered a consumer-oriented product – has become an essential cornerstone of the global economy.
This is a growth area in infrastructure. The user demand for digital infrastructure has surged from the growth of video, 5G, cloud computing, video conferencing, and now, an accelerant of all of these trends, artificial intelligence.
Physical infrastructure
This new technology requires ever more physical infrastructure such as data storage, transmission, and processing capabilities, which presents a range of investment opportunities to investors.
For instance, we prefer the mobile tower sector, which is simultaneously benefitting from strong growth trends related to 5G rollout and edge computing, such as to support autonomous vehicles, while at the same time having a foundation of contractual revenue that is a hallmark of disciplined infrastructure investing. Similarly, data centres, which were previously seen as real estate plays and relatively unattractive, have evolved into highly specialised infrastructure with demanding requirements.
Our preference in the data centres sector lies in long-term contracts with high cash flow visibility such as hyper-scale centres, or projects with privileged revenues, like carrier hotels, which benefit from strong network demand.
Case study
U.S. fibre platform
Here's a compelling digital investment opportunity we're excited about: a fibre network spanning several pivotal data centre markets across the U.S., including in the largest global data centre market of Northern Virginia.
Northern Virginia is the epicentre of the Internet, comprising roughly 20% of global data centre capacity and more than three times the next largest market (Singapore). This company provides the fibre links for both these critical data centres and mobile network towers.
This investment has an indicative Internal Rate of Return (IRR) between 10% to 12% and we anticipate notable potential for further growth in the future alongside growth in the global digital ecosystem.
High bandwidth fibre platform
Connecting data centres and mobile towers
Backbone of the internet in crucial U.S. markets
Our investment thesis
"Pick-and-shovel" play in digital sector
Scaled platform with partner credibility and a product that is high essentially, low cost
Diverse client group of major data users
1,650
Mobile towers connected
Source: Confidential manager, Russell Investments. For illustrative purposes only. Information as of June 2023. Internal Rate of Return (IRR) can overestimate the potential returns of a project or future investment by making the Net Present Value (NPV) equal to zero. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.
Social
The world of infrastructure investing is changing, and while new, emerging sectors have grabbed the limelight, existing sectors that are evolving also present a meaningful investment opportunity.
This is the case with social infrastructure, where community institutions - municipalities, universities, schools, and hospitals - are increasingly looking to private capital as a funding source for building new facilities and making improvements to existing ones.
Listen to our portfolio manager, Michael Steingold, on the range of investible social infrastructure opportunities available to investors.
Future-proofing
Behind this turn to private capital is a combination of financial reasons as well as an increase in the complexity and specialisation of the facilities, which institution staff aren’t well positioned to handle themselves.
There are two sources of higher complexity today; new technology and a focus on sustainability. Institutional facilities need to become future-proof in their technology upgrades, whether that is improving communication systems in hospitals and schools or building the latest generation innovation centres on university campuses.
Building upgrades
At the same time, facilities need to be sustainable, and many buildings require significant upgrades to meet net-zero targets. With the high-debt burden of governments post-Covid, this is where investors can assist. There is an opportunity for long-term investors to help support these essential community infrastructure projects while achieving a stable, inflation-linked return.
These factors give us confidence that the shift in the funding of social infrastructure to private markets is a long-term trend that is likely to provide stable, long-term income for investors.
Case study
U.S. university campus upgrades
Here's a promising social investment theme we're keen on: an energy efficiency solution for a private research university in Massachusetts aiming to fulfil its net zero commitments.
The university sought to reduce its carbon footprint by making its campus buildings more energy efficient. To achieve this, it collaborated with an energy-as-a-service provider who implemented upgrades such as new windows, LED lighting, improved HVAC systems, and microgrids, all under a long-term contract.
These microgrids, comprising small renewable energy plants, supply specific facilities across a 95-acre campus encompassing 72 buildings.
This investment boasts a projected Internal Rate of Return (IRR) ranging from 10% to 12%, along with delivering an energy efficiency enhancement to a critical asset, an outcome which we think other institutions will be eager to replicate.
Campus utilities
Major university New England
New windows, LED lighting, HVAC upgrades and microgrids
Our investment thesis
University goal is to reduce carbon footprint of campus
Campus is science oriented with intensive-use lab spaces
Energy as a service instead of large upfront capital investment
Source: Confidential manager, Russell Investments. For illustrative purposes only. Information as of June 2023. Internal Rate of Return (IRR) can overestimate the potential returns of a project or future investment by making the Net Present Value (NPV) equal to zero. The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.
Conclusion
The frontiers of renewable, digital, and social infrastructure represent innovative, high-growth opportunities for infrastructure investors. But beyond the compelling trajectories of each segment, investing across this trifecta unlocks an additional strategic advantage - diversification.
With their growth drivers largely uncorrelated, a balanced portfolio can be nimble and resilient. If structural shifts undermine one segment's momentum, the others can preserve performance. Those who capitalize on this diverse opportunity set can secure attractive returns while future-proofing their infrastructure allocations.
The time to embrace this multi-faceted revolution across renewables, digital, and social infrastructure is now - reap the rewards of an evolving asset class while benefiting from the power of diversification.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.
The value of investments and the income from them can fall as well as rise and is not guaranteed. You may not get back the amount originally invested.
There are no assurances that the investment goals and objectives stated in this material will be met.
Investments in private market securities are generally illiquid as such investments are neither tradable on any exchange or in the secondary market nor would they be transferrable.
The scenarios presented are an estimate of future performance based on evidence from the past on how the value of this investment varies, and/or current market conditions and are not an exact indicator. What you will get will vary depending on how the market performs and how long you keep the investment/product.
While Russell Investments considers ESG as part of our business and investment approach, our products may not necessarily be classified as ESG focused i.e. Article 8 or 9 products, under current EU regulatory criteria. It is important to note that, unless specified, the product referenced in this material should not be assumed to be classified as an ESG product (Article 8 or 9 products under EU regulation).
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