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 power plants 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 different from today. New frontiers of infrastructure require substantial capital, 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 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 achieving existing net zero commitments by 2050 will require US$3.5 trillion in capital expenditure each year beyond current levels. Private capital will be crucial to bridging this gap.1
Listen to portfolio manager, Michael Steingold,* on the new era of renewable infrastructure investing.
* Portfolio manager, Russell Investments UK.
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 wind turbines) but also in the grid enhancements that enable renewable energy, the batteries, and hydrogen that 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 decarbonization.
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 European Union's (EU's) Net-Zero Industry Act, are adding further tailwinds for investment.
Case study
North American clean energy company
Here's an example of a stock company we find appealing in our global listed infrastructure fund:
This largest clean energy utility in the US, operates across 49 American states and 4 Canadian provinces. It stands as a leading provider of wholesale power generation and energy-related services, serving over 11 million residents with clean, reliable, and affordable electricity.
Renowned for its commitment to renewable energy, this company is among the world's largest generators of renewable power. Not only does the company focus on building infrastructure and driving economic growth, but it also prioritizes meeting customers' diverse energy needs.
Serving over 11 million residents
Operating across 49 American states and 4 Canadian provinces
Our investment thesis
One of the investment manager's highest quality companies with score of 157 driven by Management and Sustainability
Source: Russell Investments. For illustrative purposes only. Information as of June 2023, all figures in USD. 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 centers, fiber, 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 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 centers, which were previously seen as real estate plays and relatively unattractive, have evolved into highly specialized infrastructure with demanding requirements.
Our preference in the data centers sector lies in long-term contracts with high cash flow visibility such as hyper-scale centers, or projects with privileged revenues, like carrier hotels, which benefit from strong network demand.
Case study
U.S. wireless communications company
Here's an example of a company we find appealing in our global infrastructure strategies.
Ranked in the Fortune 500 in 2023 by Fortune Magazine, this company aims to make wireless communication possible everywhere by owning and operating wireless towers used for mobile data, 4G and 5G. Their mission is to lead wireless connectivity around the globe, innovate for a mobile future, drive efficiency throughout the industry, and grow their assets and capabilities to meet customer needs.
Proven leader in digital infrastructure assets
Leading independent owner, operator, and developer of communications real estate
Uniquely positioned to drive sustained growth throughout the 5G cycle
Our investment thesis
The largest cell tower REIT by market capitalization
Robust carrier spending and expansion outside the U.S. bolster revenue diversification and global growth opportunities
40%
Increase in onsite renewable energy in 2023
Source: Confidential manager, Russell Investments. For illustrative purposes only. Information as of December 2023, all figures in USD. EBITA = Earnings before interest, taxes, and amortization (EBITA) is a measure of company profitability used by investors. Strategies, portfolio allocations and return targets are illustrative and subject to change and to variation in implementation. Return targets are uncertain, not guaranteed and presented gross of Russell Investments fees and expenses.
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 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 specialization 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 centers 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 in 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. *The Internal Rate of Return (IRR) is the annual rate of growth that an investment is expected to generate. It is a financial metric, used to measure the profitability of an investment, that takes into account the time value of money. 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.
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Lisa Schneider, CFA
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Head of Client Solutions
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