AI, the energy transition, and geopolitical tensions are reshaping the global economy and markets. They're also transforming the landscape of infrastructure investing. I'm Alison Nathan, and this is Goldman Sachs Exchanges. For today's episode, I'm joined by Tavis Connell, the Global Head of Infrastructure within Goldman Sachs Alternatives, which is part of our asset and wealth management business.

We'll be exploring the megatrends driving opportunities and the outlook for the sector. Tavis, welcome to Exchanges. Thanks, Alison. Look forward to our discussion today. So, Tavis, we're obviously in a very volatile market environment and investors are starting to look closely at their asset allocations. So let me start by asking you, what role can infrastructure play in portfolios?

Look, it's a great question. And, you know, in all of our client conversations today, obviously, everyone's reading the newspaper and trying to digest, you know, some of the changes that are happening. I think what's interesting about infrastructure is that, in particular, when you look at institutional investors, they've really progressively increased their allocations to the asset class over the last 10 plus years.

And so today, to give context, most large institutional investors have around 6%, 7% of their total assets invested into infrastructure. And they've done that for a couple of reasons. I think, firstly, the asset class is really a diversifier. So the correlation has low correlation with public equities, with public fixed income, but also with other private asset classes.

I think secondly, you know, it's been very resilient in particular in periods of economic uncertainty, high inflation. So, you know, one stat that we talk about with lots of our clients is you look market wide. And since the beginning of 2022, Infra has returned 9% compounded returns across the whole asset class.

And that compares with like buyout private equity at 5%, real estate at like minus 2%. So, you know, you look across different asset classes in the period over the last three years where we've had high inflation, we've had, you know, obviously war and geopolitical tensions.

And it's been very resilient during that period of time. And then really, the third thing is that it's offered pretty attractive absolute returns. And when you think about the evolution of infrastructure, it's like other asset classes like real estate or in private equity, you can invest in different parts on the risk return spectrum.

But there's many strategies within the asset class that are targeting, you know, mid-teens plus returns, which, you know, if you compound that over five years or 10 years, that's really attractive for investors have access to. So many follow ups to that. But before we get into some of the details on that.

Let's just first define what we're talking about in terms of infrastructure. I'm thinking roads and bridges, but obviously the space has evolved since then. So what do we mean by infrastructure today and how has that evolved over the last decade or so? Yeah, so it's not your mom or dad's infrastructure anymore. I think the asset class has really expanded over the last 10 plus years.

And that really reflects a couple of things. You know, first and foremost, it reflects how the needs of society have evolved and changed over the last, you know, 10, 15 years. So, you know, the two biggest segments in infrastructure today are energy, energy transition, and digital infrastructure.

And if you were to go back, you know, 15 years, those aren't really talked about much. Infrastructure 15 years ago was really focused on transport. That was probably, call it, two-thirds of the infrastructure market 15 years ago. If you look at investment volumes in infra over the last couple of years, you know, transport's been sub-20%.

So you've seen a real evolution and expansion of what infrastructure means. You know, when we engage with clients, we talk about four big segments of infrastructure investing. So as I said, you know, energy, energy transition, digital infrastructure, which is, you know, data centers, fiber towers.

And then we talk about transport and logistics, so not just traditional transport assets, but also the broader logistics and supply chain ecosystem, which obviously in today's world, there's lots of changes happening there. And then lastly, circular economy. And that's really how we think about water, wastewater, and also, you know, circular business models, which I can talk a little bit more about later in the segment.

Yeah, let's dive into some of those. You know, when we think about some of the categories you just mentioned, data centers, you know, it's a very buzzy word given how much demand for AI is skyrocketing and that has increased demand for energy and data centers. Talk to us about, you know, how investors are putting money to work in that space. Sure. So, you know, I think, you

data centers and the overall ecosystem has gone through a number of different eras, I guess to use a Taylor Swift analogy. The space we're in now is that there's still huge ongoing investment in build out of the Cloud. That's been ongoing for five, six, seven years, but it's by no means done.

And then what has gotten a lot of focus and attention is obviously AI and specifically building out the AI training models. And the requirements are different between what is needed for a data center servicing the cloud and really inference versus model training. And that's both in terms of the importance of proximity to population centers. So in other words, where you're actually locating your data center and then also just the scale.

And obviously, you know, the both the the power intensity and compute output of GPUs, you know, continues on like a Moore's law, you know, expansion. But what that means is, again, as you said, you know, the power consumption needed for for these data centers is enormous. So I'd say a couple of things are really on the minds of investors and thinking about investing into the space.

One is that there's been a huge amount of development, but once a data center is developed and has a long-term lease to, you know, a hyperscale, one of the hyperscale large technology companies, like who buys that? And there hasn't really been a fully, there's been a lot of development going on, but I'd say the capital markets for a takeout or a sale of that stabilized data center asset is still not fully developed. So that's one thing that's on a lot of investors' minds.

I'd say most institutional investors have been investing more to the cloud. And I think the question on AI training data centers is, you know, what's the residual value? Like, how long are they going to last? If you have a data center that's in some remote location because it's proximate to power, like, what happens in five years or in 10 years when that lease is, or maybe 15 years when the lease, you know, comes due? So I'd say that's been a big topic for investors in equity.

I'd say what's been quite interesting, this is more of a phenomenon in credit, is that there's a lot of financing structures that are being put into place really from a credit standpoint to finance this enormous AI build out.

And the last point I'd say is that, you know, the power side of the equation is one of the really interesting things in infrastructure. You have these four segments, but there's so many linkages between them, is that the investing opportunity in power is super exciting. And so a lot of people, both here in the U.S. and in Europe and other regions, because we've been in a flat power demand environment for 20 years, and now...

Not just, but including because of data centers, we're in a secular growth where power demand is growing 3%, 4% a year. And so huge investment requirements into that as well. I want to dig into some of those points a bit more. But before I do, just for those of us who are not as familiar with infrastructure investing, talk to us a little bit about how the returns are actually made. Do you have to sell an asset, as you just mentioned? Sure.

you know, the more value add or higher return part of infrastructure investing. It's really, let's call it private equity in infrastructure. And so most managers, most general partners will

tackle that through what we call closed ended funds. And so those mean, you know, what that means is that they will acquire a company and they want to acquire a company. In our business, a big part of value creation is buying things well, like hopefully buying things at an attractive value.

They want to drive value creation, so drive the growth of that company during their ownership period. And then typically after five, six, seven years, they will, as you say, they will sell. And that will generate a capital gain in addition to any income that they've made along the way.

In infrastructure, there's also a number of what we would call evergreen vehicles. So, you know, perpetual vehicles. Some are orientated more towards institutional investors. So, you know, big pension funds and sovereign wealth funds and so forth.

Others, and this has been a more recent phenomenon, are more targeted towards private wealth, like individual investors. And those tend to have slightly lower return targets, but still are very compelling because they offer, again, that compounding capital appreciation over time. Interesting. Let's dive into another key category that you originally laid out, which is energy transition.

Obviously, we have the Inflation Reduction Act.

That substantially boosted investment in clean energy. But is that under threat at all, given the current administration and some of its initiatives? So, you know, the IRA and where that goes has been, you know, a very topical thing within infrastructure and has been really on the minds of all market participants. I'd say along with tariffs, which maybe has taken more airtime over the last, you know, month or two.

I think a few things to mention. Firstly, most clean energy technologies are actually cost competitive without subsidies. So when you look at what's called levelized cost of energy, which is really a proxy for the all-in cost of power generation, if you look at solar generation paired with battery storage,

That is cost competitive without any incremental incentives from the government. The second thing I should say is that the incentives for, for example, solar have been in place long before the IRA was brought in. What the IRA did was enhanced some of those tax credits and other frameworks. So

I think, you know, when we look at the IRA, there are areas that we think will almost certainly be changed or, you know, partially repealed. Some of those have been telegraphed pretty clearly from the administration, even predating the election. So areas like offshore wind, incentives around EV charging, Department of Energy loans, those are three examples that we expect will be, you know, tweaked. I'd say that the the

The case for a full repeal of the IRA we think is unlikely, although sitting here on May 7th, it's dangerous making political predictions. But we think that is unlikely.

From an investor standpoint, I think for the market more broadly, what's important is clarity. These are investments that are typically 30-year-plus lives for an underlying investment, and the investment horizon of most market participants is seven years, 10 years, et cetera. So you need the certainty in order to make these long-term, very significant capital investments. And

And so I think what we'll see, I hope what we see is over the next month, two months, we start seeing more clarity come out of the administration and coming out of Congress so that people can have renewed confidence to invest. So with all of that in mind, what are the most promising opportunities in the energy transition space today from your perspective? Well, yeah.

Notwithstanding, you know, a bunch of the noise, you know, we actually think on a fundamental basis, you know, both utility scale. So utility scale just means very large projects in, you know, in solar generation and also we call distributed generation, which means smaller scale projects.

projects that often are directly linked. There's a direct link between generation and usage. So those segments we think are very interesting both here in the United States and also internationally. You know, in distributed generation, what's relevant is that the single biggest constraint, including on data centers and on energy transition generally, is the grid.

It's what's called interconnection. So it's basically the ability to connect your project to the broader grid. And with a distributed generation solution, you basically bypass transmission and distribution, and you have, again, that direct linkage. So you can deliver these projects

you know much faster and also obviates the need for as much investment you know in interconnection for those particular projects and that can offer a real cost advantage to and consumers whether they're I you know corporates or industrial companies or indeed

and residential users. So that's a space that we think is quite interesting. The other area that's also quite interesting is around energy efficiency. And when you think about corporates, technology has moved on very significantly over the last 20, 30 years.

that doesn't mean that every single corporate user of power has kept up with that. And in many cases, they need a solutions provider to come in and help them do that. So that's also an area that we're spending time on.

When you look at the opportunities in the U.S. versus elsewhere, is there a big difference? What are the trends that you're seeing outside of the U.S.? Most markets, if you take public equities, public fixed income, private equity, real estate, the U.S. market will be typically two to five times larger than the European market.

In infrastructure, the two markets are actually almost exactly the same size, which is quite unusual. And so Europe is actually a very relevant investing market for infrastructure. And it's a place where we significantly invest. I'd say what we've seen in terms of sentiment since the back part of last year

has really been a bit of a shift or a bit of a tilt towards Europe over the last four months, five months, where I think a lot of the narrative in the back part of last year was around really exciting growth in the United States, deregulation in the United States, et cetera, and concern over the outlook in Europe.

I guess a few things have shifted. We thought that pessimism was overdone. Maybe some of the optimism now is overdone. But, you know, we think Europe structurally is a very attractive market for infrastructure. You've seen Germany come out with a 500 billion euro plan around investment into infrastructure. There's also been really a renewed focus on

over the last six months in particular in Europe around having permitting reform, so making it easier to build, and also recognition that investment in infrastructure is something that can really accelerate growth. All that having been said, governments and most corporates

have strained finances. So they need to partner with private capital to be able to deliver that investment. So again, I think really interesting dynamics and opportunities within the European market. We tend not to invest in

our strategy outside of developed markets. But, you know, there are obviously huge investment needs in emerging markets as well. That's a somewhat different risk profile. And you have to take into account things like, you know, political risk and foreign currencies and so forth.

But obviously there's huge needs really all around the world. A lot of activity in India is one example. A lot of people focused on that market. And then also the Middle East, which has really traditionally been a source of capital, but it's increasingly a destination for capital and for investment as well. Before we get too far away from Europe, they also, if I'm not mistaken, have really taken the lead at the forefront of circular economy, one of those other categories that you mentioned. So you're seeing a lot of traction there.

Yeah, so I think, you know, Europe, and particularly Northern Europe, has had a and continues to have a strong focus on sustainability. And, you know, the political discussion here in the United States has become a little bit more fraught around that topic, you know, over the last period of time. But I think what that's meant is that when we look at many of our infrastructure businesses in Europe,

that's a real, if we're a leader in that space, that's a real value creation driver. We can, you know, earn a better return, you know, as a result of that. As I mentioned earlier, circular economy really tends to deal with circular business models, with waste, with water systems, you know, et cetera. And one of the things we see both in Europe and here in the United States is that most of the infrastructure in that space was built 30, 40, 50 years ago.

And so, again, you know, needs a lot of investment. And then we see interesting areas for, you know, circular business models. One example is, for example, in modular buildings. And this is something where as, you know, as populations move, as demographics change, and as needs adjust,

You know, there's often changes in what governments need in terms of healthcare, education, building large infrastructure projects. So that's an area in which we've invested where you have modular buildings that are provided. They have 30-year lives.

They have long-term contracts, typically with governments, so it's a really interesting investment proposition, but it's also a circular model where, again, you have this very long-lived asset, it's got great energy efficiency dynamics, and it's flexible, so really provides a flexible solution for some of these essential needs of governments and populations.

Interesting. So, Tavis, you've talked a bit about how uncertainty around the geopolitical landscape, around tariff policy is complicating infrastructure investing to some extent. But can you give us a little bit more color around that and also about how the financial market volatility associated with all this is creating some challenges, but also opportunities?

I'd say that within infrastructure on tariffs, the single biggest impact has been in thinking through supply chain and supply chain risks. And especially if you're undertaking significant capital expenditure,

then to the extent your supply chain has linkages to foreign countries where these tariffs have been imposed, that can present a real issue. Now, what have we been doing? What have most other market participants been doing? This was telegraphed that there were going to be some of these things likely coming down the pike, and so you could preorder equipment.

and you could try and get um you know if you think about your 2025 you know build plans well let's pre-order let's get all all that equipment you know here into the us before any of that happens i think in the very short term most prudent um you know managers have mitigated

much of that kind of short-term risk. I think the question is longer term, you know, what's the landing zone and therefore do I need to reorient my, you know, my supply chain in that regard? And look, we all have a bit of muscle memory from COVID in dealing with, you know, the whiplash and supply chains and, you know, pricing and inflation and so forth. So I'd say at least there's more muscle memory around dealing with that issue.

I'd say the second area that has been really topical, and this is more for directly regulated infrastructure assets, has been, you know, the political environment and the predictability of change.

like domestic regulation. And we've seen a number of examples in Europe where there's been quite adverse, unexpected adverse regulatory outcomes given the overall political environment. And so depending on where you're investing in infrastructure, if you're investing in a directly regulated asset that touches consumers and thus voters, then in a more

febrile economic environment where there are cost of living pressures, where there is inflation and so forth, that can impact what regulatory outcomes in terms of pricing and so forth you achieve as an infrastructure investor.

But broadly speaking, you know, these type of environments tend to be really interesting environments for us to invest because what we'd say there's a lot of dislocation and there's a lot of noise. And that usually means that things are not priced to perfection. So, you know, you can acquire assets at a more interesting basis.

And it also means that many of the ways in which we go about acquiring companies is through public to private. So we will delist a company from the stock exchange. And so you have a period where stock prices can be moving up and down. And infrastructure businesses, which are very long-term in nature...

those aren't always super well understood by public markets. So this is an environment where I think you've seen and you're likely to see more activity in, you know, public to privates. I think it's also an environment where corporates, as I mentioned earlier, corporates and governments reassess, like, what do we need to own?

And that means there are more corporate carve outs or spin outs of infrastructure assets where we and our peers can come in and offer expertise and capital to really invest behind those infrastructure assets. So I'd say for an investing environment, it's confusing. There's a lot of noise, but I think it's also a pretty interesting environment in which to be investing.

So what I'm hearing from you, Tavis, is it's a pretty good time to be investing in infrastructure. I think it is. And, you know, some of that is, you know, cyclical where we are in the market right now. But I think, you know, the most exciting thing about infrastructure is that it's a way to really invest behind these big megatrends. And you think about, you know, decarbonization. You think about digitalization. You think about the deglobalization or the changes in geopolitics.

And that really aligns perfectly with the asset class. So it's a really exciting time, whether around energy, digital, transport, to really have access to these big thematics. Thanks for joining us, Tavis. Thank you. I really enjoyed it. This episode of Goldman Sachs Exchanges was recorded on Wednesday, May 7th. I'm Alison Nathan. Thanks for listening.