It’s Time for Investors to BYOP to the Infrastructure Hyper-scaler Party

For the private-markets investor, opportunities may seem a little messy right now. The rise in request for redemptions at credit funds, the advent of 401k accounts into the investor mix and the general rough sledding due to energy prices (hitting portfolio companies) geopolitics (hitting clarity) and interest-rate outlook (hitting stability) makes this a bigger guessing game than usual.

However, this column has always focused on opportunity in our corner of Wall Street, where innovation persists regardless of market conditions.

With that backdrop, let’s take a closer look at the infrastructure sector, a long-duration theme in private markets that is currently a secular winner. The definition of infrastructure is certainly widening from the olds days (not too long ago, in fact) when bridges, tunnels and airports defined the market.

In the era of hyperscale data centers, a lot has changed. McKinsey & Co. estimates that the planet needs some $106 trillion of infrastructure investment through 2040. Of that total, private capital contributed only $200 billion last year. A record number for sure but still a long way to go, which explains why LPs of all stripes are saying infrastructure is one of the asset classes where they want more exposure and opportunity.

So where is the smart capital going? The first and biggest bucket no doubt is digital infrastructure, where McKinsey sees $1.7 trillion in global capex by 2030.

But drill a little deeper and we see vast opportunities in power and grid infrastructure in both transmission and distribution upgrades, renewables including solar and wind, as well as battery storage and waste to energy—to name just a few. Call this the guts of the digital buildout because demand cannot scale without these forms of interconnections and generation.

Of course, a lot more assets are in the mix but with time not on the side for power supply, an innovative approach is wrapping up a lot of this under the latest scramble called BYOP or Bring Your Own Power.

Because utilities alone cannot deliver megawatts fast enough to data centers, the hyper-scalers and other players are developing their own sources and integrating electricity generation on site. Think of it as a “power grab” versus land grab or as some call it, “energy campuses.”

The lines are blurring in the infrastructure ecosystem, providing new investable opportunities for LPs who want to take advantage of this new structure either through infra funds, energy-transition vehicles, or co-investments.

Risks remain with regulatory hurdles and high cap-ex costs, for example, but the digital energy infra-plex seems to be changing the landscape as demand demands quicker solutions. Just don’t forget to BYOP.

Mark Kollar
Partner, Prosek Partners

Mark Kollar’s monthly Letter from America can be read at The Alternative Investor.