The Macro Picture Shifts But Remains Supportive

The world needs $94 trillion of capital from 2016 through 2040 to maintain and upgrade legacy infrastructure as well as develop new infrastructure projects like data centers.¹ Whether it’s for the pipes and wires that bring gas, electricity or water into your home, or the supply chains moving semiconductor materials, medical equipment and pharmaceuticals around the world, the need for infrastructure investment has never been greater. And governments—many of which are facing budget constraints—won’t be able to do it alone.

From a policy risk perspective, we expect the “Three D” megatrends of digitalization, decarbonization and deglobalization to continue—regardless of the political environment. Infrastructure historically remains largely insulated from volatility due to the inherent resilience and essential nature of the asset class, which can offer a high degree of long-term contracted or regulated cash flow, inflation indexation, steady dividends and attractive performance throughout market cycles.

In the U.S., across-the-board tariffs could bring higher-than-expected inflation and weaker global growth. Yet, we believe that changes to U.S. trade policy are likely to strengthen the deglobalization trend and benefit certain infrastructure sectors, such as transport. (Generally speaking, infrastructure businesses tend to benefit from higher inflation.) While tariffs are unlikely to have a direct effect on existing infrastructure assets—these are networks that move goods and commodities, not the goods and commodities themselves—they can have an impact on some of our counterparties. If tariffs are prolonged and cause long-term economic uncertainty, this could delay counterparties’ long-term business plans—largely for new-build projects. In this case, managers can ensure that increased capex costs are factored into the pricing on new contracts.

Market speculation is also anticipating changes to the Inflation Reduction Act (IRA), which introduced key policies to encourage clean power and decarbonization efforts in the U.S. While parts of the IRA might be rolled back, we expect some important tax incentives and equity provisions to remain. We do not view a repeal of the legislation as a likely scenario given the significant power supply and demand imbalance in the U.S. It’s also worth noting that the states that have benefited the most from the IRA in terms of jobs and economic development are predominantly led by Republicans.

While the macro, political and industry landscape will continue to shift over time—as it always has—we expect the global infrastructure supercycle to continue unabated. For investors, this trend will generate attractive opportunities to capitalize on over the long term, in our view. 

The Domino Effect of AI

DeepSeek, a Chinese-based artificial intelligence (AI) company, recently made headlines with the release of a chatbot based on its new large language model. This model has achieved performance levels comparable with current industry-leading models, but what stands out is the efficiency with which it was developed. The company claimed it trained this model for only $6 million in less than two months, utilizing approximately 2,000 older generation NVIDIA chips. This approach is significantly more cost-effective and time-efficient than traditional methods.

The stock market reacted to the news quickly and negatively, reflecting concerns that, if Chinese-backed AI is on par with the U.S., it could be developed at a fraction of the cost with less hardware, fewer data centers and less electricity than anticipated. However, we view the public market selloff as largely an overreaction. We do not expect the demand for data centers to diminish—and our long-term outlook remains positive. This is partly because demand is expected to be driven largely by cloud and consumer use, with AI model training only representing about 22% of forecasted demand (see Figure 1).²

We also believe that more efficient AI technology could be net positive for the data sector and ancillary infrastructure services because:

• Cheaper AI training should result in democratizing access and enabling further AI adoption.
   
• This type of innovation in optimization and efficiency is necessary for the industry to scale.
   
• The potential capex spend on AI Infrastructure remains astronomical at 2-5x the installed capacity today.³
   
• Long-term AI computing demand growth is expected to continue and is likely to accelerate if AI training and inference (i.e., running the trained model) costs are lower.
   
• It could result in the acceleration of innovation such as artificial general intelligence and robotics, which would further drive long-term demand for data centers and ancillary services.
   
• Demand for related infrastructure will continue to grow, particularly in Tier 1 data center locations that offer maximum flexibility and support multiple use cases.

What’s more, we continue to see strong deployment opportunities on the back of digitalization and other megatrends, which has led to increased investment needed in traditional infrastructure sectors. This, in turn, can drive long-term demand not only for data centers but also other infrastructure assets such as midstream, utilities and renewables.

Getting a Grip on the Grid

The world is poised to add the equivalent of Japan’s annual electricity demand to grids each year over the next decade.⁴ The International Energy Agency expects global electricity demand to be 6% higher in 2035 than it forecast last year.⁵

Strong corporate demand, especially from data center operators and their tenants, is driving this growing need for power, and investment in renewable energy projects is proliferating worldwide to help meet it. We expect unprecedented investment in the global buildout of renewable power generation to decarbonize the power sector, the world’s largest source of carbon emissions.

Yet an important—and often overlooked—factor is the need to connect all of these new clean energy sources to the electricity grid and deliver it to the end consumer. In order to support the new renewable generation expected to come online over the coming years, utilities will need capital to significantly upgrade or replace aging transmission and distribution infrastructure. Future green energy projects are likely to face resistance until substantial investment is made in expanding and improving power infrastructure globally, as many power grids are now decades old and already operating at capacity.

As a result, utility operators are seeking substantial capital from alternative funding sources to replace legacy operating assets, adjust their business models, grow their networks and decarbonize existing operations. Increasingly, we are seeing the establishment of unregulated revenue models, driven by contractual arrangements with underlying customers who are looking for dedicated utility services to support operations.

Given the magnitude of these decarbonization initiatives, we believe that significant opportunities will emerge for investors with scale and expertise in operating clean energy solutions and grid infrastructure (see Figure 2). As the renewables sector continues to mature and as regulated utilities evolve and modernize, we expect there will be significant need for private capital.

In addition to renewables, natural gas and nuclear power will need to help provide the power supply. More specifically, natural gas is expected to contribute ~60% of the energy,⁶ which in turn will create volume demand for midstream assets responsible for the processing and transportation of natural gas. Both natural gas and nuclear provide baseload power to support the grid.

Unleashing Manufacturing Capabilities

Many countries and companies are looking to “re-shore” their essential and strategic manufacturing processes and supply chains as part of the deglobalization trend. For example, the U.S. is expected to triple its domestic chip manufacturing capacity by 2032, the largest increase in the world, according to the Semiconductor Industry Association and Boston Consulting Group. Indeed, total manufacturing construction spending in the U.S. has soared in recent years (see Figure 3). As a result, we see opportunities to provide flexible large-scale capital to onshore essential industries.

Private Capital Is Needed to Fill the Funding Gap

Governments and corporate asset owners—the historical providers of infrastructure capital worldwide—continue to face market volatility, budgetary pressures and higher debt burdens, forcing many to consider moving some key infrastructure assets off their balance sheets. The large-scale capital required to accommodate the infrastructure supercycle and an increasingly capital-constrained environment have increased demand for customized capital solutions as flexibility and certainty of funding have become paramount.

We continue to see strong deployment opportunities with the rise of AI and global decarbonization initiatives, and the breadth of investment opportunities has grown substantially. We have also seen the average transaction size rise due to the immense capital required to advance these megatrends. Indeed, private capital is best positioned to finance this infrastructure supercycle—and step in to fill the funding gap.