Infrastructure investments are projected to overtake real estate as the dominant private asset class in the 2030s, according to a report released by Preqin on Wednesday. The report predicts that the alternative asset market will expand by 74%, reaching $29 trillion between 2023 and 2029.
The shift towards infrastructure investments is driven largely by the global push for energy transition, with significant regulatory support and subsidies in developed markets aimed at decarbonizing electricity generation. These energy-focused infrastructure projects are expected to fuel the asset class’s growth, while real estate investments are being impacted by higher interest rates and a shift towards hybrid work, which has dampened demand for office space.
“Infrastructure is rapidly catching up to real estate in terms of assets under management (AUM),” the report notes, adding that the ongoing energy transition offers “a credible prospect of unlisted infrastructure overtaking private real estate in the 2030s.”
Shifting Focus in Asia: India Emerges as a Key Player
The report also highlights key regional trends, notably the ongoing outflow of foreign capital from China and the accelerating growth of India’s private capital market. Preqin predicts that India’s investment landscape will expand beyond smaller venture capital deals into larger private equity transactions. Japan and South Korea are expected to maintain stable levels of investment activity.
The Role of Interest Rates in Private Market Trends
Higher interest rates are seen as a significant headwind for private assets, which traditionally rely on debt for financing. The report outlines how U.S. Federal Reserve policies have adjusted investor expectations for interest rate cuts. In December 2023, rates were expected to fall to 3.25% by 2026, but as of mid-2024, forecasts have shifted closer to 4%. This “higher-for-longer” scenario is expected to temper deal activity until at least 2027.
The Federal Reserve is widely expected to announce its first rate cut in over four years, bringing rates down from the current 5.25-5.5% range. However, with the pace of rate reductions expected to be slow, the report anticipates that the private market will not see a significant boost in deal-making activity for several more years.
Private Equity Leads Alternative Investments
Private equity remains the largest segment of the alternative investment market, accounting for 35% of total AUM, or $5.8 trillion, in 2023. This share is expected to grow to 41%, or $12 trillion, by 2029. Hedge fund investments, the second-largest alternative asset class, are projected to decline from 27% to 20% of the total AUM during this period.
Growth in Private Debt and Emerging Deal Activity
The private debt market, which includes lending for leveraged buyouts and other financing needs that traditional banks typically avoid, is also expected to grow significantly. Private debt investments are projected to rise to $2.6 trillion by 2029, putting them on par with real estate investments.
Recent high-profile deals financed by private debt include the $13 billion acquisition of Norwegian marketplace Adevinta by a Blackstone-led consortium and the $6.9 billion takeover of British financial services firm Hargreaves Lansdown by a CVC-led group.
Conclusion: A Growing Market with Evolving Dynamics
As the alternative asset market continues to expand, infrastructure investments appear poised to take the lead in the 2030s, driven by global energy transition efforts and favorable policy environments. Private equity and private debt are also set to play major roles in the sector’s growth, while real estate investments face headwinds from changing market dynamics and economic conditions. With these shifts, investors are increasingly turning towards alternative assets as traditional markets undergo significant transformations.
18th Sep 2024
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