Despite macroeconomic turmoil in some markets, infrastructure decarbonisation and digitalisation remain viable and appealing thematic investment options in Europe. Karen Azoulay, Head of Infrastructure Debt and Paul-Francois Prouvost, Private Assets Investor Relations, review the opportunities in European Infrastructure.
Contrary to the recent policy volte-face in the US, environmental, social & governance (ESG) considerations remain a significant driver of infrastructure investment in Europe. Policy announcements and industrial proposals on the continent indicate that sustainability will continue to be essential to ensuring the region’s long-term self-sufficiency and competitiveness.
In the current environment of geopolitical and economic volatility, infrastructure is increasingly being seen as a safe-haven asset class. It offers low correlation with traditional markets, low volatility and strong downside protection.
Despite some short-term uncertainty – especially regarding US import tariffs – Europe is benefiting from growth drivers such as a commitment to innovation and technological development, as well as a cohesive industrial strategy focused on decarbonisation and competitiveness.
Recent regulatory initiatives, such as the EU’s Clean Industrial Deal and national legislation in Germany, are designed to support medium to long-term growth and incentivise investment.
Does a European focus help investors looking to advance the green transition?
The European Union (EU) has a strategic commitment to the green transition. The bloc’s industrial plan requires ready access to affordable energy to boost competitiveness. Since Europe doesn’t have the energy resources enjoyed by other markets, it must develop its own sovereign renewable energy assets.
Several recent regulatory advances emphasise the long-term importance of infrastructure investment on the continent. These complement last year’s EU Draghi report, which addressed ways of enhancing European competitiveness and directing more capital towards transport assets and sustainable infrastructure. Such initiatives should support and drive growth in the medium to long term.
Mid-cap infrastructure segment: a compelling opportunity
Mid-cap companies are crucial to Europe’s industrial plan, and to the region’s competitiveness. However, they are often undercapitalised and may not be able to access traditional financing channels. They are frequently too small or complex to attract large institutional investors.
This creates an opportunity for investors who can finance the growth of mid-cap businesses. Such players are typically operationally hands-on, which ensures a strong alignment of interest between investors and management. This also offers a chance to invest in the real economy and can provide attractive returns.
Supporting the energy transition is central to value creation in European infrastructure investment. Most of the sectors identified in the Draghi report fall within critical infrastructure categories, including energy, electricity, digital networks, clean technologies, sustainable mobility and raw materials – all essential to both the green and digital transitions.
Which sectors look particularly attractive?
The renewable energy sector continues to grow, driven largely by the ongoing electrification of the economy. The market has become more sophisticated so it requires closer analysis of merchant and development risks, but we are seeing a robust pipeline of new projects.
Battery storage is another area proving attractive. This technology is crucial for mitigating the intermittency of renewable energy sources and managing negative electricity prices.
There is growing investment in grid connection capacity, particularly through smaller, localised projects that address specific constraints. This area is becoming more technically sophisticated, especially with the integration of battery storage assets.
Clean mobility is also gaining ground as an area of focus for investors. Capital is being driven towards assets in this subsector, particularly those related to electric vehicle charging infrastructure.
Similarly, driven by both decarbonisation and the desire for energy independence, biogas is becoming an important segment.
We’re also witnessing growing opportunities around energy efficiency. Energy transition goals will not be met purely by backing renewables. Infrastructure investors are starting to realise this, even if transaction volumes are not yet as large as might be expected.
Finally, the booming datacentre market is a huge driver of infrastructure investment, creating demand for green power and connectivity. This market is increasingly funded by private capital rather than government support. While we remain cautious about highly speculative artificial intelligence-driven datacentres, we do find the robust cloud datacentre market attractive.
What are the main risks for investors in Europe over the next few decades?
There are several. In many markets, the grid is in desperate need of greater investment to facilitate the energy transition. As such, concern around the capacity of national grid infrastructure to handle the increasing volume of renewable energy is difficult to escape.
In the context of Europe’s sovereignty, access to the raw materials needed by various infrastructure assets must also be considered.
Regulatory uncertainty is something that investors should always bear in mind. While Europe generally offers a stable regulatory environment, the capacity of public authorities to deliver a consistent and supportive regulatory framework is crucial.
A predictable regulatory environment is essential to incentivise investment and create additional value. Ultimately, it’s a balancing act. Too much regulation can limit returns and create risk linked to the stability of the regulatory framework, while too little can expose investments to excessive merchant risk.
Optimistic on infrastructure
We are optimistic about the future of infrastructure as an asset class and its connection to the energy transition. Regarding the latter, in the short term, we expect several new themes to develop in the next three to five years, for example:
- A significant increase in investment in the circular economy. We expect greater capital to be directed towards maximising the use of limited resources and reducing reliance on third-party suppliers for raw materials.
- Carbon capture is poised for growth as a critical element in decarbonisation strategies.
- The market for hydrogen power, while currently slowing due to high energy prices, is likely to evolve as a major theme once electricity prices make it economically viable.
- More innovation. AI, in particular, has the potential to optimise infrastructure assets in as yet unforeseen ways.
Infrastructure has consistently demonstrated its defensive qualities, even during periods of stress, thanks to its long-duration assets, tangible cashflows and high barriers to entry. We believe infrastructure will remain essential in achieving Europe’s strategic goals and will continue to be an attractive investment option, even in volatile macroeconomic contexts.
