When Larry Fink uses the word ‘revolution’ we should probably pay attention. As the CEO of the world’s largest asset manager, Blackrock Inc, it has become increasingly difficult for Fink to find new assets which can truly move the allocation and performance dial for the $10 trillion money monster. Size is a Blackrock problem. So, if Blackrock sees opportunity it must be really big or… a revolution. More precisely, Fink believes the global economy is on the cusp of an “infrastructure revolution”.  Typically, this sector was perceived as public-private partnerships financing the construction or management of critical infrastructure like utilities, bridges, roads and transportation hubs. In return, private financing houses like Blackrock would receive steady single-digit percentage returns on their investment capital. The infrastructure asset class has grown to a circa $1.3 trillion pool of capital projects but Fink recently wrote to shareholders that “some of the most attractive opportunities in the years ahead will be in the transition finance space”. Then he took action.

In January Blackrock announced its biggest acquisition since it acquired Barclays’ asset management business in 2009. Fink wrote a cheque for $12.5 billion to buy Global Infrastructure Partners (GIP) and its $100 billion of infrastructure assets, including Gatwick Airport, Suez Group(water) and Port of Melbourne. Now recall the “transition finance” thinking earlier and consider Blackrock’s specific language in the deal announcement. The company in its press release cited “a movement toward decarbonisation and energy security in many parts of the world”. Fink went further, identifying infrastructure as “one of the most exciting long-term investment opportunities, as a number of structural shifts re-shape the global economy.” They are not alone in their excitement, or actions.

Famous private equity house, KKR, has just completed a record $6.4 billion raise for an infrastructure fund to invest in the Asia-Pacific region. Australian infrastructure leader, Macquarie Group, went further afield and raised a record $8 billion for a European infrastructure fund. Meanwhile, General Atlantic was busy last month buying UK sustainable infrastructure play, Actis, and its $12.5 billion of assets mainly located in developing countries. Oh, and CVC swooped for Dutch infrastructure manager, DIF Capital, in a $1 billion deal. Are you sensing there’s a bit of an infrastructure ‘land grab’ happening? Well, you would be in professional company. In fact, a January survey by pension consultants, Mercer, found that 54% of large asset managers polled were most likely to increase funding allocations to infrastructure. However, there is still an enormous gap between what the global economy is due to spend on cleantech decarbonisation transition and the $1.3 trillion of capital currently deployed in infrastructure funds. McKinsey reckon we will spend over $6 trillion every year until 2050. That might seem like an overwhelming funding challenge but there are a number of positive developments to report.

Firstly, we have written previously about the funding innovations which have been used to help Northvolt and H2 Green Steel raise billions in equity and debt capital. Critical to these European funding successes has been the commitment of corporates as both customers and investors with pre-orders providing a vital de-risking piece in the investment framework. Governments are also a key part of this re-configuration of industry. In our earlier article we highlighted efforts in Washington:

“Meanwhile, the US and the Biden White House has recognized a once-in-a-generation opportunity to reinvent the manufacturing base of the US with legislation (the IRA and CHIPS Acts) to allow Federal funding assistance for multi-billion dollar projects building renewable energy infrastructure, battery gigafactories and economy-critical semiconductor manufacturing fabs.”

 Europe is also getting in on the act and competing for projects connected to the global decarbonisation drive:

“Europe up until recently had strict rules on how  governments can use state-aid to lure big investment projects of private companies and potentially breach competition and single market (EU) protections. Until now. Under a new EU state-aid framework the German government last week was able to commit €902 million of funding to Swedish battery manufacturer, Northvolt, for the construction of a facility in Heide, located in Schleswig-Holstein. By creating funding flexibility, the EU were able for the first time to ensure Germany secured the Northvolt project AND prevent the probable migration of the factory to the US. This hybrid public-private financing model is a ‘must have’ given the huge up-front cash costs of these projects.”

 

Clearly, the traditional infrastructure asset class is evolving to meet not just the demands of a changing industrial landscape, but also participating in the race to digitize the global economy. Not surprisingly, we have seen digital infrastructure, namely data centres, become a focus of private capital. Blackstone, the private equity giant, has acquired 80% of Digital Realty for $7 billion with the fresh investment capital being used in a JV to build hyperscale data centre campuses in Frankfurt, Austin and Northern Virginia. Closer to home, Blackstone (again) is also reportedly in talks with data centre engineering specialist, Winthrop Technologies, with its circa $1 billion of annual revenues. Furthermore, the data centre eco-system is attracting cash-rich Big Tech investment and vested interests. Last week Google announced investment in two Dutch off-shore wind farms and a pre-purchase of their energy output to power…. yes, its own data centres. Given the potential size of digital and decarbonised economic infrastructure you might ask where else apart from government, customers and Big Tech can investment capital come from. We would suggest two areas based on history.

China is currently struggling with huge debt levels in its economy. The Shanghai stock market has already dived by 30% in the first few weeks of the year and some are quite correctly seeing parallels with Japan’s problems over the last three decades. However, China will continue to generate great wealth and build huge pools of capital. Like Japan, that capital will seek foreign opportunity rather than domestic stagnation. Think about Japan’s status today as a leading aviation leasing player, key global commercial real estate (CRE) investor and world number one creditor(lender) to the global economy. Investment capital, irrespective of country of origin, never really stops moving but follows opportunity.

Of course, some countries and sectors can be the ‘loser’ in these structural and cyclical shifts.  And, if there’s one sector under pressure right now, that must be the enormous commercial real estate(CRE) asset class. For context, the value of the global CRE sector was estimated in 2023 at $115 trillion (Source: Statista). As we write, New York Community Bank has lost 60% of its value after its shares collapsed on problem real estate loans losses. Confidence in CRE as an asset class is slipping and it’s a global phenomenon. Shares in Japanese bank, Aozora, dropped 20% in one day last week on news of US property losses and Germany’s Deutsche Bank has quadrupled its CRE loan loss provisions. That is not good news for the CRE asset class but does mean chastened investment pools will look to de-risk portfolios and search for safer assets. Global infrastructure and decarbonisation could be the big winner and it looks like the biggest beasts in capital markets are already moving.