Why BlackRock is betting billions on infrastructure


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Tit is global The economy is on the cusp of an “infrastructure revolution,” according to Larry Fink. The head of BlackRock, the world's largest asset manager, made the modest prediction shortly after announcing on January 12 that his company would acquire Global Infrastructure Partners (GIP) for $12.5 billion. This company, headed by Adebayo Ogunlesi, an old friend of Mr. Fink from his banking days, is the third largest investor in infrastructure worldwide, behind the Australian Macquarie and the Canadian Brookfield. Its assets extend from London's Gatwick Airport to the Port of Melbourne. Mr. Ogunlesi and his colleagues will collectively become BlackRock's second-largest shareholder.

Mr. Fink is not the only one excited about the industry. On January 16, General Atlantic, a private equity firm (PE), confirmed reports that it would buy Actis, an infrastructure investor focused on emerging markets. In September HVACanother PE company, announced that it was purchasing DIF, a Dutch infrastructure investor. Over the past decade, assets under management in infrastructure funds have increased almost fivefold, to $1.3 trillion, according to Preqin, a data provider. Pension funds and sovereign wealth managers have been attracted by the sector's returns, which are both attractive and relatively stable. More than half of the donors surveyed by Preqin intend to increase the share of their portfolios allocated to infrastructure. Some of the biggest of them are now investing directly in these boring assets. Why, then, all the excitement?

The infrastructure investment sector took shape in the 1990s and 2000s. Western governments, with mounting debts, began seeking private investors to acquire – and help rejuvenate – aging infrastructure, from airports to railways. of iron to the water pipes. Later, a growing number of companies, from energy suppliers to telecom operators, also turned to infrastructure investors to offload assets such as pipelines and cell towers, observes Sam Pollock, head of Brookfield's infrastructure activities.

Today, demand for infrastructure investment is exploding thanks to three megatrends, says Pollock. The first is decarbonization. For the world to meet its climate goals, some $8 trillion will need to be invested over the rest of this decade in renewable energy such as solar and wind, as well as batteries to store them and power lines. transmission to transport them. Considerable investment will also be needed in hydrogen facilities, to produce carbon-free fuel for planes and ships, as well as carbon removal. The second major trend is digitalization. Software may be eating the world, as a venture capitalist once predicted, but to do so it relies on a massive amount of physical assets, from fiber cables optical and 5g from networks to data centers. Third, deglobalization. Efforts to shift supply chains away from China are driving demand for capital-intensive factories and new transportation infrastructure to move goods by land and sea. In Europe, concerns over energy security following Russia's invasion of Ukraine have also sparked a rush to build liquefied natural gas terminals to transport the fuel from less belligerent places.

All this investment demand comes at a time when government and corporate balance sheets are under stress. The 26 trillion US dollars (98% of GDP) the federal government's debt is expected to continue to increase over the coming decade. Many European governments also face a heavy debt burden. Higher interest rates make servicing these debts more expensive. They also make life difficult for companies that have loaded up on cheap debt to boost shareholder returns. The need to get out of debt will limit their ability to make large investments in the years to come. Infrastructure investors are ready and eager to fill the void. In 2022, Intel, a major chipmaker, turned to Brookfield to finance 49% of a new $30 billion chip factory in America.

Until now, most infrastructure investors have focused on rich countries, where governments are more reliable and currencies more stable. More than four-fifths of the sector's assets under management are allocated to Western markets, according to Preqin data. At the same time, the need for new infrastructure is more pronounced in the Global South, where the population and economy are growing faster. “Investing in emerging markets represents a big opportunity for us,” says Raj Rao, one of the GIPthe co-founders of. Leigh Harrison, who heads infrastructure investment at Macquarie, notes that her company is increasing the share of its funds it allocates to these markets.

The industry therefore seems set to become increasingly important in the global economy. However, it is not without its detractors. In Britain, Macquarie has been criticized for its management of Thames Water, which manages the water supply in and around London. When he owned the utility from 2006 to 2017, Macquarie tripled the company's debts to £11 billion ($14 billion), helping to generate a significant return for himself and his others shareholders. Since then, the utility, burdened by these debts, has struggled to finance the investments needed to repair leaking pipes and reduce the wastewater it discharges into rivers. Mr Harrison counters that £1 billion a year was invested in the business during Macquarie's tenure as owner, more than in any previous period. He admits, however, that “the markets were very different” when he bought the company and that his company no longer leverages its assets to the same extent.

From spreadsheets to hard hats

In a world where debt is increasingly expensive, the way infrastructure investors make money is shifting from financial engineering to smarter asset management. Mr Harrison notes that Macquarie is increasing the number of industry experts on its team. “Where we really add value is when we bring greater operational rigor to an asset,” says Rao of GIP. He gives the example of Gatwick, where GIP has has focused on speeding up security checks, giving travelers more time to relax and indulge in some pre-flight shopping. For infrastructure companies, simply sourcing assets is also increasingly a pleasure.

Learn more about Schumpeter, our global trade columnist:
AI can transform education for the better (January 11)
Meet the savviest operators in today's oil markets (January 3)
Can anyone except Europe do luxury? (December 20)

Also: If you would like to write to Schumpeter directly, email him at [email protected]. And here's an explanation of how Schumpeter's Column got its name.



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