For the past 15 years, infrastructure has proven to be a resilient asset class, delivering strong returns in a globalised world characterised by low inflation and falling interest rates. Today, however, the environment is markedly different. Higher interest rates, rising trade barriers, geopolitical instability, fiscal imbalances, and the accelerating impacts of climate change are reshaping the investment landscape. Global growth appears supportive, but we are witnessing a comeback of market volatility reflecting uncertainty at the horizon.
In this environment, infrastructure investment is also evolving. First, in a higher-rate environment, return targets are higher. Investors are allocating to infrastructure no longer solely for diversification, and income; infrastructure is also becoming a source of enhanced returns.
Second, the market for investable infrastructure assets is changing, underpinned by the secular themes, in particular decarbonisation and digitalization. The challenge today is to adopt a more nuanced approach, tailoring portfolios to balance the security of core assets, with the growth potential of new infrastructure sectors.
Traditional assets like utilities, airports and toll roads remain central to investors’ strategies, but will inevitably undergo changes, presenting opportunities and risks. New opportunities are constantly emerging in the middle-market: distributed generation, battery storage, transport electrification, edge data centres are examples of assets that are rapidly redefining what infrastructure looks like.
For infrastructure, all this means, that value creation, will increasingly come from managers that excel at managing infrastructure operations, who are capable of leveraging megatrends as tailwinds, and that can identify and mitigate the risks that a changing global economy will bring.
Despite these complexities, infrastructure is well-positioned to continue providing a resilient source of long-term returns. Our research team will continue to help investors with the insights needed to navigate this structural shift and help them evolve their strategic thinking.
Please see below for an extract of our 2025 Outlook report. For the full version, please click the download button or here.
INFRASTRUCTURE STRATEGIC OUTLOOK FOR 2025 – EXTRACT
Key takeaways for 2025:
Macro [1]
Global Economy: Supportive global growth, but Europe continues to disappoint. Downside risks from China’s slowdown and rising trade barriers. Upside potential to medium-term growth from AI productivity boost
Regional Differences: US soft-landing, Europe challenged by de-industrialization risk; UK sees modest recovery
Inflation and Currencies: Inflation moderating, but high bond yields signal inflation and rates uncertainty; USD strength may persist
Financial Markets [2]
Fixed Income: Investment-grade bonds offer an attractive entry yield; high- yield requires careful credit assessment but credit cycle still supportive
Equities: Positive performance broadening beyond US large cap, but high valuations may limit long-term upside potential amid increased volatility
Listed infrastructure: A value play with inflation hedge and upside potential from secular tailwinds and in case of an economic slowdown and lower rates
Portfolio Construction: Portfolio rebalancing, asset selection and a pivot towards alternatives will be key to achieve long-term target returns
Alternative Capital Flows [3]
Fundraising: Improving but still below historical peaks: Real Estate fundraising weak, Infra and PE are more robust as investors seek higher returns
Infrastructure: Core infra fundraising offers attractive entry yields, private credit and secondaries may decelerate, VA fundraising resilient
Transactions: Infrastructure deal-flow improving but still below peak levels, Europe and U.S. set to remain leading markets
Growing Sectors: Increased activity across data centres, renewables and battery storage, as more investors seek higher returns
Capital Velocity: Large-cap exits remain scarce, more investors focusing on the mid-market for capital velocity
Infrastructure Performance [4]
Performance resilience: Infrastructure performance comparatively resilient, but 1 year performance down as weaker valuations feeding through [5]
Valuations: Infrastructure valuations down in 2023 and stabilised in 2024, but digital infrastructure prices high, particularly for brownfield data centres
Core infrastructure: Lower valuations provide attractive entry point, net entry returns at c. 10%, with inflation-hedge and additional upside if rates reduce
Value-Add infrastructure: Mid-market provides deep pipeline of opportunities. Net entry returns at c. 14.7%, asset selection and diversification key
Source: InfraRed Capital Partners, December 2024. is no guarantee that the forecast highlighted may materialise.
Key themes and sectors [6]
Decarbonisation
Utilities: Utilities remain resilient through adjustments to inflation and rate hikes via regulatory reviews; however, they face a capex super-cycle demanding sizable investments in electrical grids to enable the energy transition while ensuring regulatory frameworks support adequate returns. Industrial utilities are a growing sector.
Renewables & Storage: The renewables sector continues to grow robustly, bolstered by increasing power demands from the digital boom; despite the risk of policy changes with the IRA, sustained performance is anticipated amid necessary capital expenditures for scaling up capacity. PPA prices are anticipated to remain solid, amid rising power demand.
Energy Generation: U.S. shale benefits from lower domestic gas prices compared to international rates, supporting operational performance and investment attractiveness; Europe’s high energy prices drive renewable expansion but also bring affordability and energy security to the forefront of strategic considerations.
In Europe, total electricity demand is not expected to recover to pre-pandemic levels until 2026. Focusing on incremental demand from datacentres, we note that the impact of new capacity will be spatially concentrated. For example, data centre power demand accounts for c. was ~4% of total demand in Europe and the U.S., but over 10% in 5 U.S. states. Therefore, we expect that data centres will likely play a big role in some geographies in 2025. [7]
LNG Infrastructure: LNG infrastructure in Europe remains pivotal, amid lower gas supply from Russia and delays in the reconfiguration of German gas networks to hydrogen.
Biofuels: The outlook for biofuels has improved meaningfully in recent years, with hard-to-abate transport sectors anticipated to accelerate demand, such as in the case of Sustainable aviation fuels (SAF).
Energy Efficiency: In Europe, heightened energy costs are accelerating energy efficiency and the electrification of heating/cooling.
Digitalisation
Data Centres: Data centres maintain vigorous performance with significant capacity growth from hyperscale platforms to colocation and edge facilities. Increased regulatory oversight risk and prolonged utility connection times amid power constraints present challenges that could affect speed of capital deployment. Brownfield prices at historical highs.
Towers: Towers continue to prove resilient, amid network densification and rising data demand driving capital appreciation. The sector has undergone meaningful consolidation, with limited further inorganic growth potential ahead across mature jurisdictions.
Fiber: Investment will continue in regions with strong demand in Europe and the U.S. As fibre transitions from an initial heavy capital expenditure phase, it focuses on expanding connectivity and homes connected, often at lower speed than what originally anticipated.
Transport & Logistics
Airports: Performance is anticipated to remain resilient, underpinned by growing passenger demand in emerging markets and a favourable economic outlook supporting tourism demand across mature markets, yet high energy costs and a subdued outlook for business flights may somewhat cap sector growth in certain markets.
Toll Roads: Resilient performance underpinned by tariffs growing at inflation, yet sluggish industrial production in Europe amid a fragile economy may somewhat cap heavy vehicle traffic.
Ports: Port operational performance remains underpinned by resilient trade volumes and tariffs supported by inflation increases. Nevertheless, the medium- term outlook remains exposed to the risk of rising trade barriers, geopolitics and supply chain reconfiguration.
EV Charging: Load factors of EV charging anticipated to grow, albeit at a slower rate than what was initially planned, amid slower EV adoption rate, but medium- term outlook remains very supportive.
Source: InfraRed Capital Partners, Infralogic, December 2024. Past performance is not indicative of future returns. There is no guarantee that the forecast highlighted may materialise.
Valuations: Valuations in the infrastructure sector have seen downward adjustments in light of heightened interest rates, but now appear to have stabilised, presenting a relatively compelling entry point from a tactical perspective, particularly for certain Core infrastructure investments. Deal selection remains pivotal, as shall long-term interest rates remain stickier for longer, the effect of higher interest rates may still require some time to fully feed through for assets where debt comes up for refinancing.
As competition intensifies for new large-cap assets, we may witness an expanding valuation gap between middle-market and large-cap assets — potentially enhancing multiple expansion tailwinds for mid-market assets at exit.
Energy sector valuations have returned to normal after experiencing volatility post-2021 due to the onset of the Ukraine conflict and supply disruptions. In the digital domain, there’s been a marked uptick in valuations, particularly for data centres highlighting the importance of deal selectivity and as the sector positions itself favourably for new capacity development over acquiring brownfield projects from a risk-adjusted perspective. The cost per square meter for data centre space has surged dramatically from c. $500 to nearly c. $900 [8], suggesting investors might find better opportunities by focusing on burgeoning areas like edge computing.
Source: InfraRed Capital Partners, Infralogic, December 2024. Past performance is not indicative of future returns. There is no guarantee that the forecast highlighted may materialise.
Historical Performance: Infrastructure has shown performance resilience in recent years, outperforming other alternative asset classes despite challenging macroeconomic conditions.
Assets with inflation-linked revenue streams, particularly in core strategies, continue to deliver stable cash flows. Nevertheless, the recent valuation adjustment has been feeding through, with 1 year performance down to 8% as at June 2024.[9]
Real estate has faced pressure due to rising interest rates, while private equity (PE) has experienced return compression, largely due to limited exits and elevated financing costs. Infrastructure’s alignment with megatrends such as decarbonisation and digitalisation has elevated its status from a defensive asset to a total-return enhancer, as also highlighted by a stronger short- term performance compared to PE.
Source: InfraRed Capital Partners, Preqin, December 2024. Past performance is not indicative of future returns. There is no guarantee that the forecast highlighted may materialise.
Performance Forecast: The infrastructure investment landscape presents compelling opportunities for investors and a favourable risk-return profile, driven by attractive entry returns, and alignment with structural trends offering capital appreciation potential for value-add strategies, in our view.
Source: InfraRed Capital Partners, December 2024. Net returns, debt returns equal buy-and-hold entry yields. Past performance is not indicative of future returns. There is no guarantee that the forecast highlighted may materialise.
The repricing of core infrastructure equity has created compelling entry points, offering a solid premium over private credit in terms of total return potential.
Sticky inflation may present tailwinds to future cash flow upside for core assets whose revenue growth comes also from inflation sensitivity. We forecast 2025 average entry returns for Core infrastructure to be at c. 10%, while value-add infrastructure is expected to deliver gross total returns at c. 14.7%.[10]
Source: InfraRed Capital Partners, December 2024. Past performance is not indicative of future returns. There is no guarantee that the forecast highlighted may materialise.
Gianluca Minella
Head of Research
Sources:
1. Macrobond, 2024
2. Macrobond, 2024
3. Preqin, Infralogic, 2024
4. Returns indicated are estimates for 10 year net entry IRRs as at December 2025. There is no guarantee that forecasts highlighted will materialise
5. Preqin, 2024
6. InfraRed Capital Partners, December 2024. There is no guarantee that forecast highlighted will materialise.
7. IEA, 2024
8. BCA Research, November 2024
9. InfraRed Capital Partners calculations based on Preqin data, as at 13 December 2024
10. Returns indicated are estimates for 10 year net entry IRRs and entry yields for debt as at December 2024. There is no guarantee that forecasts highlighted will materialise.
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InfraRed has based this document on information obtained from sources it believes to be reliable, but which have not been independently verified. All charts and graphs are from publicly available sources or proprietary data. Except in the case of fraudulent misrepresentation, InfraRed makes no representation or warranty (express or implied) of any nature or accepts any responsibility or liability of any kind for the accuracy or sufficiency of any information, statement, assumption or projection in this document, or for any loss or damage (whether direct, indirect, consequential or other) arising out of reliance upon this document. InfraRed is under no obligation to keep current the information contained in this document.
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