Data centers and renewable energy have emerged as two of the fastest growing sub-sectors within the infrastructure asset class.

The digitalization the economy and the transformative impact of generative AI on society and business has seen a surge in demand for data, which is forecast to climb from just two zettabytes in 2010 to 2142 zettabytes by 2035, according to CBRE Investment Management analysis.

The exponential increase in data demand has in turn driven unprecedented levels of investment and growth in the data center market. According to Blackrock the data center market is expanding at a compound annual growth rate of 22 percent and will reach 291 GW by 2030, while data center M&A reached an all-time high of $73 billion in 2024, according to Synergy Research.

Growth in renewable energy market, meanwhile, has been spurred by initiatives to reduce carbon emissions, strengthen energy security, and transition the global energy system off hydrocarbons in order to mitigate the risks of climate change. According to the International Energy Agency (IEA), the ratio of clean power to investment to hydrocarbon investment has increased from 2:1 in 2015 to 10:1 in 2024, with global renewable energy capacity expected to expand by 2.7 times by 2030.

Changing the face of infrastructure

The growth of data centers and renewables reflects the changing way investors and dealmakers are thinking about infrastructure.

Traditionally infrastructure has been defined as an asset class focused on “hard” assets in the built environment, like roads, railways, and utilities, but the combination of rapid advances in digital technology, growing sensitivity to climate change risk and increasing electric vehicle use, is reframing how governments, investors and consumers think about essential services.

These megatrends are broadening out the scope for where and how infrastructure funds invest, with Goldman Sachs Asset Management noting that there is more scope for infrastructure funds to invest in assets with a wider variety of risk profiles, at different points in their development cycle.

The emergence of data centers and renewables in the infrastructure mix are illustrative of how infrastructure has expanded beyond its core and core-plus base, where investors target classic, mature assets with long-term contracted revenues that deliver steady yields, into value-add infrastructure, where assets require investment and enhancements; and opportunistic infrastructure, where investors will take on construction and development risk.  

Data centers and renewables can straddle the full infrastructure risk curve, with managers either targeting the steady yields on offer from established renewable energy and data center assets characterized by contracted revenue streams and inelastic demand, all the way through to higher returning value-add and opportunistic plays, where infrastructure investors will either digitalize and decarbonize existing assets, or finance the construction of new data centers, wind and solar farms.

Data centers and renewables do present the key infrastructure investment characteristics (defensive, predictable cashflows and returns with a low correlation to market cycles and other asset classes), but in different shades.

This means that the lines between infrastructure and other asset classes, such as real estate, can often blur and overlap.

Data centers, for example, provide an essential service, and have high barriers to entry and have long-term contracts, which puts them squarely in the infrastructure bucket; but also exhibit real estate characteristics, as they will usually be leased to third-parties and their relative attractiveness will be determined by location, access to utilities, and permitting sign-offs, according to CBRE Investment Management.  

For investors and dealmakers, it is important to have an investment framework in place that is flexible and can accommodate any natural overlaps between infrastructure and other asset class, but also precise enough to avoid strategy drift.

Intertwined fortunes

As the data center and renewables asset classes continue to evolve and expand, their progression will become increasingly intertwined.

The single biggest bottleneck to meeting data center demand will be access to power. Data centers are heavily power consumptive. In the US, for example, data centers currently account for 2.5 percent of total US electricity consumption, and close to a fifth of power generation in Northern Virginia, where around half of the US’s data center infrastructure is located, according to CBRE Investment Management. By 2023 data centers could account for 7.5 percent of US electricity consumption.

Linking data center assets up to the power grid, however, is complex process, with timelines for securing permits and adding to grid capacity running from anywhere between 5 and fifteen years.

Grid bottlenecks can pitch data center developers against other, as new renewable energy assets are also faced with long lead times and delays to secure access. CBRE Investment Management notes that in the US alone close to 1,600 gigawatts of electricity generation capacity – mainly from wind, solar and storage – is awaiting the regulatory green light to access the power grid.

But while data centers and renewable may be scrambling against each other for scarce grid access in some cases, there is also growing cooperation between the two assets classes to meet their respective requirements.

Data center users, for example, are working with renewable energy providers to offset emissions from their energy intensive operations. Bringing on additional renewable power capacity will be crucial for data center growth.

According toMcKinsey, hyperscale data center operators are among the biggest backers of 24-7 renewable energy power purchase agreements (PPAs) (where energy users commit every hour of electricity consumption with hydrocarbon free generation) with these PPAs filling the gap left by government-backed subsidies and tax credits that funded the roll-out of renewable energy projects, but have gradually been rolled back as renewable energy has matured and become more competitive with hydrocarbon power generation on price.

Google, for example, plans to purchase clean energy 24 hours a day on every grid it draws power from. In 2024, for example, the technology giant signed up to its largest PPA deal ever, buying up 470MW of offshore win capacity to power its Dutch operations. Microsoft has agreed a similar deal in Sweden, while Amazon is now one of the single biggest corporate buyers of renewable energy in the world, backing over 500 projects with annual generation capacity of 77,000 GwH, according to Data Center Dynamics.

For renewable energy project developers, the strong demand from data centers for clean energy ensures that they have a ready-baked market for their output, with PPA deals securing long-term contracted revenues at a set price for all their energy production.

PPA deals, however, are not only a way for data centers to offset fossil fuel power consumption. Data centers and renewables providers are also developing new models to supply clean energy to data centers directly.

Data Power Optimization (DPO), for example, focuses on aligning the location of data centers with so-called “stranded” renewables assets in remote ocean and desert locations, where there is plenty of wind and sun, but it is difficult to transmit this energy to populous urban areas where its required.

Matching up these locations with data centers solves for the grid access issues a data center may encounter, as well as given the data center direct access to clean energy, while ensuring that the renewable energy provider has a buyer for its production.

Indeed, Data Center Dynamics reports that technology companies are teaming up earlier with renewable energy developers earlier in the development of renewable energy projects to secure long-term energy supply deals for their data centers directly. As demand energy-hungry data centers continues on its upward trajectory, renewables power provision will be a crucial lever for meeting this energy ask. Infrastructure investors targeting one of these asset classes will find that its long-term progress is becoming inextricably linked with the other.

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During the last decade private infrastructure has grown from an esoteric asset class on the periphery of the private markets ecosystem into a mainstay of alternative asset portfolios.

In 2010 infrastructure assets under management (AUM) only totaled less than US$170 billion, according to Preqin figures, but during the following decade infrastructure AUM have grown at an annual compound rate of 16 percent and now exceed US$1 trillion.

The steady long-term cashflows and relative low volatility that characterize the asset class have made infrastructure one of the fastest growing areas of private market.

The strategy, of course, hasn’t been immune from the wider headwinds that have faced private markets through the recent interest rate rising cycle. Infrastructure fundraising has declined for three years in a row, falling to the lowest levels in a decade in 2024.

Over the long-term horizon, however, infrastructure remains a highly attractive investment strategy for pension and sovereign wealth funds that want to diversify their private markets portfolios and build exposure to assets that offer inflation protection and stable, uncorrelated investment returns.

Even as AUM have skyrocketed, many investors are still under-allocated to infrastructure, with a survey of more than 100 investors in 20 countries by Cornell University’s Program in Infrastructure Policy and advisory firm Hodes Weill Associates found the almost two thirds of public and private pension funds said they were under-allocated to infrastructure, while global institutions, on average, reported being 1.23 percent below targeted allocations.

After a challenging 36 months, prospects for fundraising are looking up, demonstrating long-term investor appetite for exposure to the asset class.

Infrastructure Investor estimates that the ten largest funds in the market will seek to raise more than US$143.63 billion between them alone during the next year, while asset manager Schroders sees fundraising rebounding back in line with historical patterns.

With the private infrastructure industry set for a period of sustained growth, Alter Domus provides a detailed breakdown the attributes that make infrastructure such an attractive investment strategy for long-term institutional investors.

1. Assets with predictable cash-flows

Infrastructure assets, such utilities, transport networks, schools and hospitals, provide essential services funded by non-discretionary spending, with demand sustained across investment cycles.

As providers of essential services, infrastructure assets and operators benefit from long-term financing arrangements fixed contractable revenues, often running for 10 years or more and supported by government guarantees.

The fact that infrastructure provides non-discretionary services makes it easier to pass on high-costs to end users, and many contracts will have inflation-adjustment mechanism provisions, offering a shield against inflation on margins.

Analysis from KKR shows that in cycles of high inflation, infrastructure assets provide superior real returns to equities and real estate.

2. Returns with low correlation to other asset classes

Infrastructure will typically produce returns that have low correlation with other asset such as equities and fixed income. This offers investors attractive diversification benefits, as well as steady revenues and yields through downcycles.

Hamilton Lane analysis shows that the pooled one-year IRR for global infrastructure over the last ten vintage years, has come in at 12.5 percent, and when looking at the highest and lowest 5-year annualized performance periods over the last 20 years, investors in infrastructure avoided the drop off on performance observed in other asset classes.

3. Returns with low correlation to other asset classes

Infrastructure assets will typically have long life spans, making illiquid private markets funds are good structure for holding these assets.

For pension funds, insurers and sovereign wealth funds that have to meet long-term financial liabilities the long hold periods for infrastructure assets (HarbourVest estimates that core infrastructures assets can have asset lives in excess of 100 years) are a good option for matching liabilities with assets to ensure they meet their investment obligations.

4. Solid underlying growth fundamentals

A confluence of global megatrends is driving up demand for infrastructure investment across all areas. There is a long growth runway ahead for infrastructure investors, driven by multiple factors:

• The world’s population has more than tripled since the 1950s, according to the United Nations, driving up demand for energy, transport, water and sanitation and telecoms.
• The world is more urbanized. More than half of the global population now lives in urban areas – up from a third in 1950, according to the UN. The drives particularly intense demand for ongoing infrastructure investment in concentrated areas
• Decarbonization will require existing infrastructure to be retrofitted to reduce energy and emissions, as well as investment in new infrastructure to facilitate the use of renewable energy, as well as battery storage and charging infrastructure to support the switch to electric vehicles.
• The digitalization of the economy, cloud computing and the rise of AI are driving huge increase in demand for investment in data center capacity. According to BlackRock, data center capacity will have to expand at a compound annual growth rate of 22 percent to meet projected demand.
• There is an urgent requirement to upgrading aging infrastructure. According to the American Society of Civil Engineers failure to upgrade existing assets could cost the US economy up to US$4 trillion GDP between 2016 and 2025.

5. Partnering with government to deliver infrastructure

Government budgets are stretched following the pandemic period, especially as borrowing costs have gone up. It will be difficult for governments to meet infrastructure investment requirements without private capital.

Partnering with governments using structures like public-private-partnerships (PPPs), where the private and public sector share the risk and capital expenditure burden of construction new assets, opens opportunities for the private sector to support the build of new infrastructure projects in return for access to stable revenue streams and the appreciation of underlying asset values.

PPPs are designed to share risk between the state and private sector, making it easier for private infrastructure players to invest than taking on greenfield projects without the support of the state.

6. A pathway to meeting ESG obligations

Almost all institutions will be obligated to meet environmental, social and governance (ESG) goals as part of their investment mandates.

Infrastructure assets are well-positioned to align these ESG goals with financial performance metrics. Investments in clean energy, water sanitation or schools and hospitals all present sound commercial investment opportunities, but also drive visible, positive environmental and social impact.

Risks and challenges

Regulatory risk:
Infrastructure can be impacted by shifts in government and regulatory policy, which can disrupt revenue and funding models, particularly for assets developed in PPP deals.

Political risk:
Some jurisdictions can present political risk and even possible expropriation in some circumstances. Protecting infrastructure assets in unstable regions can erode earnings.

Operational risk:
Infrastructure assets are complex and challenging to build and maintain, which can often lead to delays and cost overruns. Construction consultancy Mace estimates that four in five large infrastructure projects globally experience cost or time overruns, while McKinsey analysis shows that 98 percent of mega projects will exceed budgets by more than 30 percent, with more than three in four of these projects subject to delivery delays of at least 40 percent.

A good fit for institutional investor portfolios

It is important for investor to go into the infrastructure segment with their eyes open to these risks, but equally important to recognize that experienced managers with proven operational expertise will be able to mitigate these risks significantly through due diligence and building up diversified portfolios of infrastructure assets.

For institutional investors the benefits of infrastructure allocations to a portfolio far outweigh the risks. The asset class dovetails tidily with long-term private markets fund structures and presents investors with stable, long-term revenue streams that are insulated against inflation and have low correlation to other investment classes and economic cycles. Infrastructure investment also aligns with ESG objectives

As growing populations drive long-term demand for infrastructure, and with governments unable to meet investment demand without private sector capital, infrastructure will remain a key part of private markets portfolios.

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