News about decarbonization, shipping accidents, and government initiatives has put the spotlight on infrastructure. The infrastructure industry—encompassing roads, railways, seaports, aviation, energy, water, and telecommunications—plays an outsize role in the economy and our daily lives. Globally, every dollar invested in infrastructure adds $1.50 to GDP (Source: The State of the US infrastructure, and the multiplier estimated for the United States is twice as large (Source: Real Estate Advisors). Investments in infrastructure also create jobs, enable digital applications, and support efforts to mitigate climate change.

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To do all this and more, infrastructure companies need funds, and governments are playing a significant but insufficient role in meeting that need. The vital question, then, is whether infrastructure can also engage private investors. To get these investors on board, companies learn to ride the tailwinds, improve their performance, and build a strong business case for investment.

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Infrastructure Needs Greater Private Engagement

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Infrastructure investment in the United States is inadequate for the need. Public and private investments between 2007 and 2015 averaged 1.5% of US GDP (Source: Global Infrastructure Hub). This is comparable to the investment rates in the United Kingdom, Germany, and Mexico but behind the rates in Australia and Saudi Arabia (around 3.5% of GDP) and Indonesia and India (4%). Investment in China has been far in the lead, averaging 7.4% per year. The low rate of US investment shows up in infrastructure needs: 30% of power transmission lines are expected to need replacement in the next decade (Source: Advanced Conductors to Accelerate Grid Decarbonization, overloaded aviation infrastructure caused 20% of US flights to be delayed in 2019 (Source: The State of the US infrastructure), and US infrastructure was ranked 13th in 2019 by the World Economic Forum’s Global Competitiveness Report, down from ninth place in 2018 (Source: U.S. Chamber of Commerce).

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Private investment rebounded following the pandemic, and although the interest rate spike of 2023 contributed to a dip that year (Source: S&P Global), we see signs of a positive outlook for the years ahead. Three major deals have been announced in 2024 already with BlackRock’s acquisition of Global Infrastructure Partners ($12.6Bn deal creating a fund manager with $150Bn in AUM), General Atlantic Service’s Acquisition of Actis ($96Bn AUM diversified global investor), and KKR’s biggest APAC infrastructure fund ($6.4Bn). The outlook is positive with LPs poised to boost investments by USD 600Bn+ by 2027 (Source: BCG).

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Still, even more private-sector engagement is needed. Within the US, the expected total investment in 2016–40 is $8.5 trillion, but the cumulative investment needs total $12.3 trillion, leaving a gap of almost $4 trillion in unmet needs (Global Infrastructure Hub - United States). Meanwhile, country’s debt burdens have risen dramatically to 1.2x of GDP in 2021, so further public investment is unlikely. Adding to the challenge, today’s high-interest-rate environment is making retail investors cautious, so to unlock funds, infrastructure companies will need to be ready with a strong business case.

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Despite Strong Tailwinds, Room for Performance and Valuations Improvement

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Infrastructure companies building a case for investment can point to strong tailwinds for the industry. Demand is set to recover following the pandemic downturn. For example, within aviation, passenger traffic and cargo shipping expected to rebound to ~1.1x by 2025 and ~1.2x by 2030, respectively (Source: 2023 ACI NA Infrastructure Needs Report). Within the energy sector, decarbonization, digitization, and artificial intelligence are spurring growth (3.4% CAGR annually from 2023-2026 vs. 2.2% growth observed in 2023) in the demand for electricity (Source: IEA), which is adding urgency to modernization of the electrical grid. The US Congress responded by passing the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, which together included infrastructure funding of $1.7 trillion.

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Infrastructure companies building a case for investment can point to strong tailwinds for the industry. Demand is set to recover following the pandemic downturn. For example, within aviation, passenger traffic and cargo shipping expected to rebound to ~1.1x by 2025 and ~1.2x by 2030, respectively (Source: 2023 ACI NA Infrastructure Needs Report). Within the energy sector, decarbonization, digitization, and artificial intelligence are spurring growth (3.4% CAGR annually from 2023-2026 vs. 2.2% growth observed in 2023) in the demand for electricity (Source: IEA), which is adding urgency to modernization of the electrical grid. The US Congress responded by passing the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, which together included infrastructure funding of $1.7 trillion.

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How the Sector Can Attract Private Investors

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The companies that attract private engagement will be those that demonstrate how they can outperform their peers. From our experience within the broader industrial sector, we have identified four ways companies typically do this:

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1. Portfolio management. Divest noncore assets and pursue acquisitions that are aligned with the core business.
2. Prioritization of high-growth areas. For example, energy companies could seek innovation opportunities involving solar and wind energy while exercising caution on hydrogen, where cost is high, and technology is in early stages.
3. Stellar operating performance. Over the past few years, the industrial companies with the greatest increase in shareholder returns (TSR of 15.7% from 2017 to 2022 vs. 6.7% for overall sector) were the ones where revenue grew at least 10% and earnings grew at least 15%.
4. Positive investor relations. Other things equal, companies deliver greater value when investors experience clear and trustworthy communication that includes a clear path to growth and management attention to risks and other concerns.

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Is the infrastructure industry finally ready for primetime – greater private engagement and sustained performance? The need for private investment is clear, but not all infrastructure companies have pulled together the compelling story and performance history to support engagement. Nevertheless, the path forward has been mapped, giving investors and management alike a chance to create value while serving the pent-up demand for electrification, decarbonization, digitization, mobility, clean water, and many other trends contributing to quality of life.

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Do not miss Ayna's podcast series: Future of Infrastructure featuring prominent guests like Brian Ryks , Executive Director & CEO, Metropolitan Airports Commission; Giulia Siccardo , Director, Office of Energy & Mfg. Supply Chains, U.S. Department of Energy (DOE); Neil Chatterjee, Former Chairman & Commissioner of Federal Energy Regulatory Commission and Senior Advisor at Hogan Lovells ; and Tricia Breeger , President & CEO, Mitsubishi Electric Power Products, Inc.. These leaders share insights on the course of the sector amidst winds of disruptive changes and challenges.