Infrastructure has attracted investors, government support, and media coverage because of its critical role in the economy. And given the challenges of aging bridges, the urgent task of decarbonization, and other forces, the industry is riding significant tailwinds. However, the need for investment exceeds the funding so far, especially given investors’ caution in an era of higher interest rates. Companies and investors alike need to learn the tools for creating resilient businesses with favorable prospects for growth.

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Infrastructure: An Economic Engine in Need of Investment

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Infrastructure provides the framework on which economic growth is built by enabling transportation, supply chains, electric power, and the sharing of information. Investments in infrastructure provide an outsize payoff in GDP: infrastructure is a three-times fiscal multiplier in the United States.

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But this powerful economic engine has been receiving only modest investments— only 1.5% of GDP in the US market, versus 5.1% for China and 2.5% to 3.5% for other BRICS nations (Exhibit 1). Signs of underinvestment include aging and underperformance, leaving US infrastructure ranked 13th globally in 2019, a drop from being 9th in 2018.

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Exhibit 1

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The US lags when it comes to infrastructure investment as a share of GDP

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Investors Are Taking Notice

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Still, the sector is capturing the attention of public and private markets. Infrastructure experienced a strong rebound from the pandemic-induced downturn: for the US Infra ETF, total shareholder returns (TSR) have averaged 20.9% since April 2020, versus 19.4% for the S&P500 (Exhibit 2). This, despite the sector historically trailing (a six-year TSR of 9.1%, versus 12.6% for the S&P500).

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Exhibit 2

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Since 2020, infrastructure has outperformed other sectors, trailing just oil and gas and mining in first place and IT in second

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The rebound was followed by a lull in 2023 as investors reacted to a surge in interest rates. However, private investment is expected to rebound. Encouraging signs include some big deals in the first quarter of 2024, including BlackRock-GIP’s deal involving assets under management (AUM) of $150 billion and General Atlantic’s acquisition of Actis (AUM of $96 billion). Limited partnerships are expected to boost investments by more than $600 billion by 2027. Institutional investors new to infra (with less than 10 years’ experience) are looking to increase exposure with their ample dry powder of $340 billion).

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Private Investment Is Critical

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Public markets are cautious, governments’ indebtedness is high, and projected demand for infrastructure is robust. In this context, meeting the demand for infrastructure will require private engagement more than ever. However, projected investment in the United States between 2016 and 2040 is expected to fall short by about $4 trillion (Exhibit 3). In the area of public funding, a major impediment is rising government debt loads, which were 1.2 times GDP in 2021 for the US government. And in the private sector, investors tend to be cautious about long-term projects in a high-interest-rate environment.

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Momentum Could Attract Private Capital

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Infrastructure companies seeking investments have some advantages relative to companies in other industries. In particular, two signs of industry momentum are strong tailwinds and government policies that will add to the demand for infrastructure. Sector momentum could favor an influx of private capital.

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Strong tailwinds include the 3Ds of demand, decarbonization, and digitization. Demand recovered strongly from the pandemic. For example, global electricity use is forecast to rise by 3.4% annually, and in aviation, passenger and cargo activities are expected to rebound to about 1.1 times 2019 levels by 2025 and about 1.2 times by 2030. The widespread focus on decarbonization is requiring $4.5 trillion in clean energy and $5 trillion in sustainable aviation. Digitization is stimulating demand because it involves energy consumption and enables attractive benefits from modernizing infrastructure. Two sources of high demand are US grid modernization and airports. With all 50 states taking at least one or two actions toward grid modernization, the total capital required could reach $2 trillion (Exhibit 3). And at airports globally, 90% of leaders say they want to pursue digitization by 2025.

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Exhibit 3

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Within the US, a big push toward grid modernization is expected to drive investment

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In addition, governments support infrastructure with a variety of initiatives. In the United States, two laws have recently allocated funds for infrastructure projects. The Infrastructure Investment and Jobs Act (IIJA) includes a budget of $1.25 trillion to be awarded by 2030, of which $350 billion has already been awarded. And the Inflation Reduction Act allocates $500 billion primarily for clean-energy initiatives by 2030. This investment is projected to add more than 200,000 jobs in the near term, plus an additional 1.5 million over the next decade.

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Room for Performance Improvement

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Though we see promising signs for the future of infrastructure, companies recently have struggled to make the most of these conditions. Their collective financial performance leaves room for improvement. This presents opportunities for companies that are outperforming their peers and for investors with capacity to help companies learn the practices associated with success.

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The listed US companies within the sector trail on multiples: enterprise value (EV) to sales of 2.3, versus 5.4 for real estate, 5.1 for IT, and 5.1 for financial services. In addition, gains have slowed to 0.9 times over the previous four years, versus 1.2 times over 10 years.

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The sector achieved above-market EBITDA margin expansion, but it fell behind on revenue growth and cash flow generation (Exhibit 4).

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Exhibit 4

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Despite above-market shareholder returns, infrastructure multiples lag most other major sectors

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Priority Areas for Future Success

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To improve performance, boost valuations, and attract private capital, infrastructure companies can have the greatest impact by prioritizing four key areas: active portfolio management, prioritizing the right areas for innovation, setting a high bar on operating performance, and effective investor engagement. Active portfolio management increases the odds of delivering high performance when companies divest noncore assets and focus on strategic M&A. Companies can benefit from prioritizing innovation in high-growth areas (for example, solar and wind energy) while exercising caution on lagging opportunities, such as hydrogen. Setting a high bar on operating performance is associated with a dual management focus on achieving revenue growth of at least 10% and EBITDA growth of 15% or more. Companies maintain strong investor interest when they innovate on business models and communicate value to capital markets effectively.

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The infrastructure sector has started to attract the interest of investors in both the public markets and private sector. However, infrastructure companies will need significantly more private-sector engagement than in the past. Assuming that the trends for demand growth and infrastructure aging continue, an investment shortfall lies ahead, and government cannot do more, given its debt load. At the same time, retail investors may hold back because of high interest rates. This leaves the private sector, with its deep pockets and long-term outlook. But need alone won’t attract investors; given the current room for performance improvement, infrastructure companies will have to show they are ready for greater private engagement. For companies willing to demonstrate their readiness, experience shows which priority areas to focus on.

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