Powering the digital economy: why core infrastructure is gaining renewed attention

Infrastructure has traditionally played a defensive role in advised portfolios. Investors have long valued the asset class for stable cash flows, inflation protection and resilience during economic downturns. Today, however, the investment case is evolving as technological change and electrification dramatically increase demand for physical infrastructure.

For Teiki Benveniste, Managing Director and Head of AWMS Australia & New Zealand, the shift reflects a widening gap between the infrastructure the global economy requires and the capital available to build it. Private markets are increasingly stepping in to fill that gap, creating a growing opportunity set for long-term investors.

“There is clearly a situation where you don’t have enough capital available to meet the demand for the additional infrastructure required to support the new economy,” Benveniste says.

The digital economy’s infrastructure problem

Infrastructure investment has expanded steadily since the global financial crisis. Governments have reduced direct spending while private capital has stepped in to fund projects ranging from renewable energy to telecommunications networks. Despite this growth, demand is still accelerating faster than available capital.

The digitalisation of the global economy has been a major driver. Cloud computing, remote work and online commerce have dramatically increased data consumption. “Even before AI entered the picture, the move to the cloud and the digitalisation of the economy had already created an imbalance between infrastructure demand and supply,” Benveniste says.

Artificial intelligence is now amplifying those pressures. AI applications require vastly more computing power than traditional internet searches, translating into significantly higher electricity consumption. As data centre capacity expands, the demand for reliable energy infrastructure rises with it.

Industry projections suggest that by 2030, data centres in the United States could consume more electricity than all but six countries globally. Meeting that demand will require hundreds of gigawatts of additional generating capacity and roughly US$2 trillion ($2.8 trillion) in investment.

Importantly, the growth in electricity demand is not driven solely by artificial intelligence. Manufacturing reshoring, electrified transport and broader digitalisation are all contributing to rising power consumption across the economy.

Investing in core infrastructure assets

The scale of these investment needs is creating opportunities across the infrastructure landscape. However, investors can approach the sector in several ways. Some strategies focus on developing new assets and taking on construction risk. Others concentrate on acquiring infrastructure once it is already operational.

Ares has chosen the latter approach. Rather than building new projects, the firm focuses on acquiring stabilised assets that have completed development and construction. These assets typically generate contracted revenues and operate under long-term agreements with creditworthy counterparties.

“We’re not trying to pick the next technology winner or build the next power plant,” Benveniste says. “We’re buying hard assets that are already operating, generating cash flow and contracted with investment-grade counterparties.”

This strategy allows investors to benefit from infrastructure demand while avoiding the risks associated with early-stage project development. Developers often sell completed assets in order to recycle capital into new projects. That cycle creates a steady supply of operational infrastructure investments for long-term capital providers.

Many of these assets also have long useful lives. Infrastructure such as renewable energy facilities or grid assets can operate for decades while producing predictable cash flows.

A yield-focused approach

For investors, the appeal of core infrastructure lies in its income profile as well as its defensive characteristics. Assets providing essential services often operate under long-term contracts, which can anchor revenue streams and reduce volatility.

Benveniste says this stability can play an important role within diversified portfolios. “Infrastructure assets are difficult to replicate and often provide services that remain essential regardless of economic conditions,” he says. “These assets are providing essential services to the economy and they are extremely difficult to replace. That’s why they can bring diversification, lower volatility and downside protection to a portfolio.”

Returns in core infrastructure strategies are typically driven largely by income rather than capital gains. Investors receive distributions generated by the operating cash flows of underlying assets. In some cases, tax structures and depreciation allowances can also improve the efficiency of those distributions.

This yield-based profile has made infrastructure increasingly attractive to wealth investors seeking steady income streams alongside long-term growth exposure.

A long runway for infrastructure investment

The infrastructure demands created by digitalisation, electrification and population growth are unlikely to diminish anytime soon. Energy grids must expand, data centres must scale and transportation networks must adapt to growing urban populations.

For private capital, that combination represents a multi-decade investment opportunity. Governments alone cannot fund the required expansion of global infrastructure systems.

Benveniste believes the key for investors is focusing on assets that already provide essential services and stable cash flows. In a rapidly evolving technological landscape, owning the underlying infrastructure that powers the digital economy may prove a more durable strategy than trying to predict which technologies will ultimately dominate.

As the energy transition and digital transformation continue to accelerate, the role of infrastructure within investment portfolios is likely to expand. For investors seeking both resilience and exposure to structural growth trends, core infrastructure may increasingly sit at the centre of the conversation.

This article is for informational purposes only and is neither an offer to sell nor a solicitation to purchase any related securities. Investing in private markets investments involves a high degree of risk including, but not limited to, risk of substantial loss of principal.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results an investor can expect to achieve. These materials may contain “forward-looking” information that is not purely historical in nature, and such information contained herein is based upon certain assumptions about future events or conditions and is intended only to illustrate hypothetical results under those assumptions (not all of which will be specified herein).

Laurence Parker-Brown

Laurence Parker-Brown is head of content at The Inside Network and managing editor of The Inside Adviser and Investor Strategy News.