Can infrastructure investors pair growth and stability?

There’s a buzz around infrastructure at the moment, whether due to new government spending, the growing need for AI-ready systems, heightened concerns about energy security — exacerbated by the US-Iran conflict — or simply a recognition of the role that listed infrastructure can play in portfolios during times of uncertainty. How can investors best harness this structural potential?

How to capitalise on structural potential

Investors will be watching closely as structural drivers translate into real-world investment opportunities. Investment pledges — such as Germany’s €500 billion infrastructure package— are expected to support new projects, AI demand is driving real-world infrastructure shifts and energy security concerns are prompting governments to invest in generation, storage and grids. Investors might therefore conclude that the best way to benefit from these structural tailwinds is to look at more cyclical, volatile infrastructure stocks to capture growth. The problem with this approach? It erodes many of the potential benefits that make infrastructure such a valuable part of portfolios in the new economic era — the potential for downside and inflation mitigation and greater income stability.

Some investors might consider increased volatility a fair exchange for higher growth potential. This makes sense if you’re facing a choice between defensive, low-growth utilities and growth-exposed, volatile infrastructure. But what if this is a false choice?

Today’s infrastructure tailwinds are broad-based

You don't have to invest in cyclical businesses to benefit from infrastructure tailwinds.

The listed infrastructure investment universe is remarkably heterogenous. One part of the infrastructure universe is comprised of more cyclical exposure (such as transport companies or commodity-levered exposures), while steadily growing companies with regular, stable dividends, such as regulated utilities, form the other, more defensive side of the infrastructure universe. Interestingly, increased infrastructure spending will significantly benefit the second group given the drivers of the growth.

Regulated utilities are not only less sensitive to economic cycles than cyclical companies, but they may also be among the principal beneficiaries of today’s structural trends given the growing demand for power, specifically electricity. Here is why:

• Regulators recognise how essential this growth is to the overall economy. This recognition may explain why most regulated utilities are allowed to pass inflation on to their users, either directly or indirectly, even when inflation is elevated, as it is currently. In addition, many regulators are now incentivising utilities to continue to invest in growth by increasing their allowed returns.
• Furthermore, as part of their commitments to infrastructure, governments will be investing heavily in electrification, upgrading and modernising grids and networks and taking steps to improve resilience, all of which tie directly to regulated electricity utilities. New sources of power, whether traditional or renewable, not only need to be connected to the grids but also require the grids themselves to be upgraded to increase their capacity.
• Finally, resilience has become a focus for governments concerned about energy security. Decarbonisation is continuing to drive demand for renewable sources of energy, but investment in flexible generation and batteries is necessary to solve for their intermittency and ensure reliable power. These growing and changing demands, along with cyberthreats, are increasing the risk of large-scale power outages, such as the one that hit the Iberian Peninsula in 2025. In response, governments and regulators are placing a greater emphasis on supporting the provision of reliable capacity, including through capacity payments for integrated utilities, which compensate utilities for ensuring that power is available if needed.

Case in point: Germany’s path to electrification is far more challenging than the one faced by other European countries, such as France, due to its historic reliance on fossil fuels for heating. Its grid infrastructure is in critical need of upgrades, both in terms of connecting new sources of electricity to the grid and upgrading existing grid connections to meet higher electricity demand. As a result, Germany needs to invest more heavily in its networks than other countries. This, coupled with Germany’s new focus on infrastructure investment, provides a positive setup for the regulator to increase returns for utilities.

You don’t have to reach for yield to capture returns

At first glance, the returns on offer from utilities may appear predominantly tied to yields. This brings us to another false choice that investors typically encounter when considering infrastructure investments. If I’m stuck with defensive assets, I should reach for as high a yield as possible. However, if you believe, as we do, that the market overpays for current yield but underpays for steady growth and reinvestment, there is another way. We believe that growth is usually a response to a need or scarcity, which also tends to result in governmental or regulatory support. Building on that premise, we think that focusing on growing, regulated assets with exposure to structural themes can lead to an attractive risk/return profile and faster-growing dividends over time, especially compared to broad equity exposure.

We believe that the potential returns from regulated utilities that can reinvest for growth rather than just pay out excess cash as dividends are increasing, for two reasons. First, the key driver of value creation for networks is the level of returns permitted by the regulator. In our view, regulators have become increasingly aware that allowed returns must be set at attractive levels to incentivise new investment. This alignment between utilities and the regulator is starting to manifest in proposals to increase the headline-allowed returns for networks for many European utilities. Higher allowed returns increase the potential returns on growth investment, which should generate stronger returns over time than simply capturing a yield.

Second, we’ve long believed that companies that are reinvesting have the potential to earn higher returns, but it's also important to understand that there are mechanisms through which many European utilities can earn higher prospective returns relative to the last few years. Some regulatory frameworks — for example, in Italy, the UK and Germany — allow for incentives. These incentives may include operational incentives (such as beating cost benchmarks or operational targets) or financial outperformance (such as by borrowing more cheaply than the regulator’s set rate). As a result of these incentives, the “better” utilities can earn premium returns over and above the headline returns offered by regulators.

Case in point:The German regulator’s headline-allowed returns may not look especially attractive, but there is considerable scope for beating benchmarked cost allowances, particularly for larger companies.

The bottom line

Infrastructure is trending — but the real opportunity lies in identifying assets that can benefit from today’s growth opportunities to deliver attractive long-term returns. We believe investors don’t have to expose themselves unnecessarily to cyclicality, compromising the downside mitigation offered by infrastructure, in order to benefit from structural tailwinds. Stable companies that provide steady income while also reinvesting for growth are an underappreciated, yet crucial, part of the next generation of infrastructure.