How AI, tariffs, and the energy transition are reshaping infrastructure investing

Infrastructure Investment Outlook and Sector Trends

• Portfolio Allocation and Performance

  • Large institutional investors currently hold approximately 6% to 7% of total assets in infrastructure.
  • The asset class demonstrated nine percent compounded returns since the beginning of 2022, outperforming private buyout (five percent) and real estate (minus two percent) during the high-inflation, high-uncertainty period.
  • Infrastructure is utilized primarily for low correlation with public equities, public fixed income, and other private assets, while providing resilience against economic volatility.
  • Strategies within the sector target mid-teens plus returns over five- to 10-year horizons.

• Sector Evolution and Definition

  • The infrastructure asset class has shifted from transport dominance (66% of the market 15 years ago, now sub-20%) to include energy transition and digital infrastructure as primary segments.
  • Goldman Sachs categorizes current opportunities into four main segments: Energy/Energy Transition, Digital Infrastructure (data centers, fiber, towers), Transport/Logistics, and Circular Economy (water, waste, circular business models).
  • Traditional "mom-and-pop" infrastructure definitions are obsolete; the sector now encompasses modern digital and sustainability-focused assets.

• Digital Infrastructure and AI

  • Data center development is driven by two distinct needs: ongoing cloud expansion and the specific power-intensive requirements of AI model training.
  • AI data centers require significant power capacity and proximity to power sources rather than just population centers.
  • Investors are concerned about the limited capital market liquidity for selling stabilized data center assets, particularly those located in remote power-proximate areas.
  • The question of residual value is prominent; investors are assessing how long AI-specific data centers will remain viable given rapid GPU expansion and Moore's Law-like compute growth.
  • Credit markets are actively financing AI build-outs, contrasting with equity-focused valuation challenges.
  • Power demand is entering a secular growth phase of 3% to 4% annually, reversing a 20-year flat demand trend, driven largely by data center expansion.

• Energy Transition and Policy

  • Most clean energy technologies, specifically solar paired with battery storage, are now cost-competitive without government subsidies based on levelized cost of energy (LCOE).
  • Goldman Sachs expects specific Inflation Reduction Act (IRA) incentives for offshore wind, EV charging, and Department of Energy loans to be tweaked or repealed, but views a full IRA repeal as unlikely.
  • Investors prioritize regulatory clarity over 30-plus-year asset lifecycles and are awaiting renewed government communication to restore confidence.
  • Distributed generation is identified as a high-opportunity segment because it bypasses grid interconnection constraints, offering faster project deployment and cost advantages.
  • Energy efficiency services for corporations represent another growth area as corporate power usage lags behind technological advancements.

• Geographic Trends: US vs. Europe vs. Emerging Markets

  • Unlike other asset classes where the US market is 2–5 times larger than Europe's, the US and European infrastructure markets are currently of almost equal size.
  • Investment sentiment has shifted in the last five months toward Europe, driven by Germany's €500 billion infrastructure plan and renewed focus on permitting reform.
  • European structural attractiveness is balanced against strained government and corporate finances, necessitating private capital partnerships.
  • Goldman Sachs generally avoids emerging markets due to political and currency risks, though activity is noted in India and the Middle East, which is evolving from a pure capital source to an investment destination.

• Circular Economy and Sustainable Models

  • Europe, particularly Northern Europe, leads in sustainable infrastructure, viewing circular economy practices as a value creation driver.
  • Significant investment is required to modernize circular economy infrastructure built 30 to 50 years ago, including water and waste systems.
  • Modular buildings are highlighted as a circular investment model, offering 30-year lives, long-term government contracts, energy efficiency, and flexibility for changing demographic needs.

• Geopolitical Risks and Market Volatility

  • Tariff uncertainty primarily impacts supply chain management; prudent managers have mitigated short-term risks by pre-ordering equipment before imposition.
  • Long-term supply chain reorientation remains a critical consideration for large capital expenditure projects.
  • Political environments with cost-of-living pressures can lead to adverse regulatory outcomes for directly regulated assets, affecting pricing power.
  • Market dislocation and noise create acquisition opportunities, particularly in "public-to-private" transactions where long-term asset value is often misunderstood by public markets.
  • Corporate carve-outs and spin-outs are increasing as governments and corporations reassess asset ownership in favor of private sector expertise.

• Investment Vehicles and Strategies

  • Value-add infrastructure investing is predominantly conducted through closed-ended funds with 5- to 7-year holding periods, aiming to buy assets attractively, drive growth, and generate capital gains upon exit.
  • Evergreen (perpetual) vehicles exist for institutional investors (pensions, sovereign wealth) and increasingly for private wealth, offering slightly lower return targets with compounding capital appreciation.
  • The sector is characterized by a strong alignment with mega-trends including decarbonization, digitalization, and geopolitical deglobalization.