The Next Generation of Infrastructure in Action: Observations and Opportunities from Europe

Infrastructure plays a critical role in our everyday lives. The essential services infrastructure provides—utilities, energy infrastructure, communications and transportation—form the backbone of the global economy and allow society to efficiently function. Infrastructure assets facilitate movement in a way that we believe enhances productivity. Some examples: electricity along transmission lines, data on a telecommunications network, and cars on a road.

Infrastructure is a relatively stable asset class, yet it is evolving. We see a meaningfully higher, and different, investment cycle ahead, with the private sector playing an increasingly critical role in infrastructure development amid government budget crunches. Technological innovation and changing consumer and voter priorities are fueling the three themes that we see shaping the next generation of infrastructure investment: the electrification of the global economy toward renewables, exponentially increasing data needs, and urban areas’ need for innovative congestion solutions.

Leonardo Anguiano, portfolio manager for Brookfield Public Securities Group’s Infrastructure Equities team, recently returned from a due-diligence trip to Italy, his first trip in a year. There, he visited most of the largest local infrastructure companies and observed real-world examples of how the infrastructure investment landscape is evolving, creating potential new opportunities for investment in next generation infrastructure.

The companies he spoke with all cited the projects that have suddenly become viable thanks to the European Union’s (“EU”) Next Generation stimulus fund. The stimulus is meant to kick start the recovery of European economies emerging from the COVID-19 pandemic while at the same time encouraging the development of a greener and more digital Europe, a priority of the EU electorate. The source for much of that stimulus: EU debt issuance, which gives investors an opportunity to participate in the novel opportunities traditional infrastructure companies are seeing as the asset class transforms.

Here are three real-world examples of such opportunities from our portfolio manager’s recent Italy trip. While the examples are Italy specific, they are illustrative of what we see as similar evolutionary trends and opportunities across the globe.

A new use for traditional gas infrastructure assets, giving them longevity beyond the life of conventional natural gas. As the world transitions toward renewables, natural gas is set to be a partner for at least some of the energy evolution. Yet the jury is still out regarding what will happen to gas infrastructure assets such as pipelines in 20 to 40 years. Snam, a company that owns the entire high-pressure gas transportation, storage and regasification network in Italy, has been talking for some time about “green hydrogen” (e.g., hydrogen produced from green energy sources, biomethane, etc.) and other gas blends eventually flowing through its pipelines. Yet green gases like hydrogen are still cost-prohibitive energy sources. The EU stimulus money, however, could help drive the economies of scale necessary to make mass production of hydrogen from solar energy viable.

Accelerated development of solar generation and transmission capabilities. Italy has long been a net importer of electricity from France and a huge importer of gas from Russia and elsewhere. One project mentioned in discussions with Terna, Italy’s electricity transmissions system operator, was the development of solar generation in southern Italy and, eventually, North Africa, creating an Italian energy system that’s cleaner, more resilient, and less dependent on external sources of energy. In order to get there, the complexity and interconnectivity of the local transmission system needs to improve even further, which potentially requires decades of investment.

Solutions to edge cloud computing latency issues. Rai Way, an Italian company that owns the digital terrestrial television (DTT) tower transmission assets for state-owned RAI, Italy’s public TV broadcaster, envisions developing small data centers at the foot of some of its broadcast towers. The data centers would provide data storage and accelerate data transmission to help with edge cloud computing latency issues. One such tower is located in Rome on a hilltop site near the Vatican. (See the image below from our portfolio manager’s recent trip.) The EU’s Next Generation stimulus fund may help to drive the digitization trend in Italy and make such data centers a reality.

Capturing These Opportunities

It’s important to remember that infrastructure is not very disruptable. People are not going to stop drinking water or using electricity, for example. Yet we do see changes on the horizon related to how infrastructure assets are used, including the examples cited above. While the stability of infrastructure is one of the asset class’s most attractive characteristics, in our view, the changes that we anticipate are driving a wave of new investment, creating the exciting opportunities that we see in listed utilities, communication towers and toll roads.

We believe an active investing approach is best poised to capture such opportunities. At Brookfield, our investment process for listed infrastructure securities is aligned with our owner-operator heritage. We focus on long-term, risk-adjusted returns, and put considerable weight on capital preservation and capital protection.