Mounting debt levels and tightening fiscal constraints have led governments globally to shift infrastructure spending off their balance sheets, leaving a substantial capital shortfall to maintain and modernize aging infrastructure systems. With deeper technical and operational expertise and access to large capital pools, private market investors are playing a growing role in financing the infrastructure that underpins modern economies.
Over the past decade, institutional demand for private infrastructure has surged with assets under management growing at a compound annual rate of 16% to reach $1.3 trillion today. While the asset class has not been immune to the broader slowdown affecting private markets — fundraising remains below its 2022 peak, and deal activity has tempered — it remains well positioned for long-term growth.
For investors, the strong historical performance, downside protection, and diversification benefits of the asset class remain appealing, and as an era of benign inflation gives way to one of more persistent price pressures, infrastructure’s inflation-hedging capabilities have become all the more valuable. Further, infrastructure’s fundamental alignment with decarbonization, digitalization, and deglobalization continues to attract investor interest.
Infrastructure’s resilience and performance stem from a set of defining features, including inflation-linked assets, markets with inelastic demand, portfolio diversification, downside protection, and predictable cash flows through long-term contracts backed by investment-grade counterparties.
That said, as the infrastructure asset class has grown, so has its sophistication. Today, infrastructure encompasses everything from core, low-risk assets with stable, long-term cash flows to higher-yielding, opportunistic investments. Here, we explore the foundational characteristics that have long defined infrastructure’s appeal and how those traits can manifest across the asset class’s expanding risk curve.
Infrastructure offers investors compelling risk-adjusted returns, in part due to its low correlation with other asset classes. Much of this resilience stems from the essential nature of infrastructure assets — such as water, electricity, and transportation — which continue to see steady demand regardless of broader economic conditions, offering a built-in measure of downside protection.
Private infrastructure has shown notable stability during periods of market stress, particularly when compared to public equities. For example, during the sharp selloff that followed the Federal Reserve’s interest rate hikes in 2022, the S&P 500 fell by approximately 24%. In contrast, private infrastructure assets remained largely untouched.
Additionally, diversification also extends within the asset class itself. Infrastructure spans a wide range of sectors, including utilities, transport, energy, digital infrastructure, and more. Investors also have the option to invest up and down infrastructure’s risk curve, tailoring exposures to different sub strategies with varying risk-return profiles.
However, infrastructure assets with revenue structures tied to GDP growth don’t maintain the same degree of protections. Airports and certain toll roads, for example, generate revenue based on usage volumes that are more correlated with consumer sentiment and economic health. Still, when viewed across the full spectrum, infrastructure as an asset class has delivered attractive returns with lower volatility compared to public equities, real estate, and fixed income.
Private infrastructure offers investors several buffers against inflation. As with other real assets, infrastructure investments have underlying tangible assets. High barriers to entry, including steep upfront capital requirements and regulatory hurdles, often limit competition and reinforce the scarcity value of these assets.
In addition to benefiting from asset appreciation and monopolistic market positions, many infrastructure investments generate revenue through long-term contracts with built-in inflation protection. Contracts in sectors such as utilities, transport, and energy often include clauses that link revenues to inflation benchmarks like the Consumer Price Index (CPI) or Producer Price Index (PPI), ensuring income rises in step with costs. Data centers and cell towers, too, typically operate under multi-year leases that include annual rent escalators tied to inflation.
Still, portraying infrastructure as a universal inflation hedge can be an oversimplification. While contracts include inflation-linked adjustments, time lags between rising costs and revenue increases can expose some assets to short-term pressures. Moreover, even with inflation-linked revenue provisions in place, increases in input prices or labor expenses can impact operating costs.
This said, because infrastructure assets deliver essential services, they benefit from strong pricing power, and this inelastic demand often gives operators greater ability to pass cost increases on to consumers. For example, Petya Nikolova, deputy CIO and Head of Infrastructure at the New York Pension System, has commented on how infrastructure provides the “best inflation pass through in private markets.”
Ultimately, while diversified infrastructure portfolios have historically shown strong performance in inflationary periods, some segments are more vulnerable to inflationary pressures than others, and protections can differ significantly by asset and sector.
Historically, infrastructure returns have largely been driven by yield, rather than capital appreciation. These income streams stem from long-term contracts, concession agreements, and payments from governments or consumers tied to essential asset operations.
This said, revenue structures vary across the asset class. Core and core plus infrastructure investments tend to deliver stable and predictable cash flows rooted in the structural advantages discussed above: demand for critical services, monopolistic or near-monopolistic market dynamics, and long-duration contracts supported by government-regulated counterparties.
However, the balance between income and capital appreciation starts to shift moving up the asset class’s risk curve. Value-add and opportunistic infrastructure strategies — such as growth platforms and development-stage assets — rely more on operational improvements, capital expenditures, M&A, or expansions to generate returns. As a result, these investments tend to be driven primarily by capital appreciation, rather than steady income, marking a departure from the stable cash flows that have typically characterized the asset class.
Infrastructure also provides exposure to themes, such as decarbonization, digitalization, and deglobalization, where the majority of capital formation in private markets is coalescing today. However, investing in these sectors tends to shift portfolios further up the risk curve. These emerging segments tend to be more competitive, eroding the monopolistic traits and inelastic demand that traditionally underpin infrastructure’s appeal. They also carry greater development risk and are more vulnerable to shifting political winds.
Further, as investor capital flows into high-demand infrastructure sectors, it brings with it a familiar challenge — inflated valuations. Skyrocketing prices in subsectors, such as digital infrastructure heighten the importance of disciplined underwriting and rigorous portfolio management.
Ultimately, beneath the surface, infrastructure assets are anything but uniform. They span a wide range of sectors, geographies, and stages of development, with varying revenue models and risk-return profiles. The number of these “boxes” an asset must check increasingly depends on an investor’s specific risk tolerance and strategic objectives.
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