What's Driving Private Infrastructure Growth?

In our Annual Global Private Wealth Survey, we asked advisors which sectors of the private markets they’re planning to increase allocations to in 2025. The sector that came out on top: private infrastructure. 

The reasons behind infrastructure’s popularity range from its role in A.I. expansion to its historic positive correlation with inflation. In this discussion, Stephen Brennan, Head of Private Wealth Solutions and Brent Burnett, Global Head of Infrastructure and Real Assets, dig deeper into what’s driving investment into private infrastructure. Watch the video or read the highlights of the Q&A below.

Why does infrastructure represent an attractive investment opportunity?

Steve: Financial advisors are allocating more client capital to private markets. Lately we're hearing about increased interest in private infrastructure. Why do you think infrastructure represents an attractive investment opportunity for advisors and their clients?

Brent: There are two different factors behind this: Macro influences and specific asset class drivers.

I’ll start with the macro influences. There are common forces shaping capital formation across private markets today. Those include A.I. and digitization, energy transition, supply chain optimization and global sustainability. There's a view that infrastructure is a very good way to participate in those themes.

At the asset level, infrastructure has a very compelling risk/return profile combining capital appreciation with income. It provides diversification benefits because it has very low levels of correlation with both traditional and other alternative asset classes and a positive correlation to inflation.

So, you have strong total returns. You have a balanced mix of income and capital appreciation. You have diversification benefits in the portfolio. And you have inflation correlation.

How do you think about risk and return in infrastructure?

Steve: You described the risk/return profile of infrastructure as an asset class. But that doesn’t necessarily describe the investments you and your team are executing. Can you talk about you manage risk and return in the infrastructure space?

Brent: Think about the infrastructure risk spectrum.

Core infrastructure occupies the very low end of the spectrum, consisting of assets with long-term contractual cash flow streams. Its return profile typically falls between five to seven percent, with 80–90% of those returns stemming from income distributions during the holding period. Consequently, core assets are often regarded as fixed income alternatives. However, a key concern with core assets is their heightened sensitivity to interest rates.

Core plus infrastructure is riskier than core. Core plus assets provide a balance between income and capital appreciation.

Next on the risk spectrum is value add infrastructure whose return stream comes more from capital appreciation and less from income. 

We play squarely in core plus and value add opportunities. Our preference lies in existing operating assets with a pre-contracted book of business, offering strong visibility into growth potential. By underwriting these assets effectively, we can achieve higher returns without additional risk, as they inherently include a growth component.

How has A.I. impacted infrastructure?

Steve: Normally here at Hamilton Lane, when we think about AI, we're talking about the venture capital or growth equity asset classes. Can you expand on how AI has impacted the infrastructure asset class?

Brent: We are especially excited about AI. AI requires substantial infrastructure support, primarily in the form of data center capacity, which in turn relies heavily on power.

Without considering AI, growth projections for data center capacity demand in North America are 10 to 12% annually. However, when you factor in AI,  demand is expected to surge to between 15 and 20% per year. A sector with baseline demand growth of 10 to 12% is already attractive, but when AI pushes that into the high teens, it creates a powerful dynamic that drives capital formation.

Power is a critical derivative of this trend. Data centers are energy-intensive, and one of the biggest obstacles to their expansion is access to sufficient power. As a result, AI's rise has heightened interest in both data centers and power generation solutions. Infrastructure investors are now exploring both renewable and traditional energy options, like natural gas-fired facilities, to meet the escalating power demands driven by AI growth.

How might political changes impact infrastructure investing?

Steve: There's been a lot of focus on the Trump administration's approach to infrastructure. How do you think the new administration will approach infrastructure spending, and how will that differ from the prior administration?

It's hard to tell at this early point in the presidency. One concern has been around the Inflation Reduction Act (IRA), which President Biden enacted. The IRA expanded tax credits for solar and wind projects, broadening the scope of qualifying assets and participants. I anticipate that Trump will leave these underlying credits largely unchanged, with minimal risk of sweeping alterations to credit markets.

Aside from that, Trump has made some changes which align with his campaign promises. He’s placed a moratorium on a small subset of the private infrastructure market:  federal leasing for offshore wind in the U.S. Additionally, he has adjusted direct subsidies for electric vehicle consumers, though this remains a minor concern for investors.

Trump has also signaled a willingness to improve the environmental review process and lower permitting barriers. For example, he’ll likely lift a ban on Liquid Natural Gas (LNG) capacity expansions, a big target for infrastructure investors, which could reopen export opportunities.

Overall, I think the major infrastructure-incentivizing pieces of the IRA, particularly the credits, will remain intact. Marginal sectors might see impacts, but areas like renewable generation, traditional power, and midstream energy could benefit from policy changes.

Steve: Thank you. Brent. Do you have any additional thoughts?

Brent: We couldn't be more excited about the opportunity set for infrastructure right now. We think this is an asset class that can continue to generate very compelling returns with strong downside protection.