This is a sponsored article from KKR.

Investor demand for assets that can potentially provide shelter against volatility, higher interest rates, and inflation does not appear likely to ebb anytime soon, particularly given heightened geopolitical tension and the threat of tariffs and trade wars.

In recent years, private infrastructure has demonstrated resilience in volatile markets while offering strong long-term growth potential. As economic uncertainty, inflationary pressures, and interest rate fluctuations continue to create challenges for investors, private infrastructure provides both a defensive bulwark and an offensive opportunity for capital appreciation.

Defensive strength

One of the defining characteristics of private infrastructure is its stability across economic cycles. Assets such as power grids, data centres, telecommunications towers, and transportation networks are indispensable regardless of macroeconomic conditions, translating into steady cash flows and lower volatility relative to other asset classes (Exhibit 1).

Exhibit 1: Private infrastructure provided equity-like returns with credit-like volatility from 2004-2023

Data as at 12/30/2023. Private Real Estate modelled using the Cambridge Associates Real Estate Index. Private Infrastructure modelled using the Cambridge Associates Infrastructure Index. Private Equity modelled using the Cambridge Associates Private Equity Index. Private Credit modelled using the Cambridge Associates Private Credit Index. Source: KKR GBR.

Historically, private infrastructure has exhibited strong performance even during periods of economic distress. These assets tend to have a substantial market share and contractual revenue streams that provide insulation from external shocks.

Similarly, private infrastructure can offer a natural hedge against inflation, given that many assets have built-in inflation adjustments through contracts or regulatory revenue frameworks.

An opportunity for upside

Even with private infrastructure’s defensive capabilities, investors do not need to forgo returns. Private infrastructure has outperformed most asset classes except traditional private equity over the past decade (Exhibit 2).

Exhibit 2: Total returns by asset class (last 10 years through 2Q24)

Note: Analysis using quarterly returns from 2Q14-2Q24. Private Equity, Private Infrastructure, Private Credit, and Private Real Estate refer to the respective Cambridge Associates Benchmark Index and are quoted in net return. Global Equities refers to the MSCI World Index. Listed Infrastructure refers to the S&P Global Infrastructure Index. Global Bonds refers to the Bloomberg Global Agg Index. Global Equities, Listed Infrastructure, and Global Bonds are gross returns. Source: Bloomberg, MSCI, Cambridge Associates, KKR GBR analysis.

In our view, private infrastructure can produce strong returns for two reasons: Value creation and exposure to structural growth themes.

Value Creation

At KKR, we focus on creating value in our infrastructure investments using tools we have honed managing businesses for nearly 50 years, including:

• Streamlining operations by simplifying business models and focusing on core infrastructure services
• Optimising assets by implementing best practices, strategic capex, and improving management teams
• Making strategic shifts to unlock opportunities in a changing environment
• Expanding access to capital markets by identifying the right sources of capital and achieving the most attractive terms for transactions

Structural growth themes

Private infrastructure sits at the heart of transformative structural shifts. In addition to traditional sectors such as utilities and conventional energy, we continue to see a convergence of two key trends in the market: digitalisation and energy.

Data centres and other large-scale power users require more electricity for their operations. Supported by long-term trends like the migration to the cloud and technologies such as videoconferencing and streaming video, the increased demand for data creates a compelling backdrop to invest in the hard assets enabling the digital ecosystem. Fiber optic networks, wireless towers, and other assets are all part of the digital landscape, but none have attracted more attention than data centres.

Not all data centres are created equal, and broad exposure does not guarantee investment success. Knowing how to properly value and future-proof investments, strong relationships with the largest tech companies, and capital preservation are key to investment success. The recent emergence of DeepSeek’s generative artificial intelligence model, which seems to require less computing power and less power to run, shows how important it is to invest against existing demand, rather than investing speculatively against expected demand.

We have taken this approach in our data centre investments to date. Together with Global Infrastructure Partners, we own CyrusOne, a leading global hyperscale data centre provider with more than 55 data centres in North America, Europe, and Asia. We also partner with Singtel’s data centre business, which has been operating data centres in Singapore for over 20 years and works with hyperscalers and large enterprises under long-term contracts. We recently invested alongside Singtel in ST Telemedia Global Data Centres, one of Asia’s largest hyperscale data centre operators, with 95 data centres in 11 countries and a presence in over 20 major business markets.

An all-round strategy

We feel infrastructure is a versatile asset class that offers strong growth potential without sacrificing stable returns. Infrastructure assets across many different sectors benefit from long-term demand tailwinds, while skilled managers can often make assets more efficient, profitable, and better positioned for long-term growth. Meanwhile, the key characteristics of infrastructure – strong market share, contractual revenues, inflation hedging, and necessity to society – have historically given the asset class stability through the cycle.

This is a sponsored article from KKR.