In 2021, the 27 EU member states and the European Parliament agreed to enshrine the goal of carbon neutrality by 2050 in a “climate law”. And this “Green New Deal” is much more than just wishful thinking, as it not only sets ambitious targets but more importantly provides for massive investments, particularly in infrastructure. So to make the most of it, the biggest winners could be direct investments in infrastructure projects.
Green New Deal: ambitions and the means to achieve them
Like the famous New Deal launched in 1933 by President Roosevelt, the European Green New Deal is a massive stimulus plan that aims to give new impetus to the European project. While, as its name suggests, it aims to address the challenges of climate change, its ambitions are much broader, as it plans to direct investment to deliver real benefits in terms of jobs, health, safety, education, cost of living, social justice and public services. In short, the aim is to reduce emissions, while creating jobs and improving quality of life, including through the development of the circular economy and the preservation of biodiversity.
By committing to becoming the first continent to achieve carbon neutrality, this plan will enable the EU to transform itself into a climate change resilient society. And beyond that, it is a real growth strategy aiming to transform the Old Continent into a modern, competitive and resource-efficient economy.
And for once, this Green Pact for Europe is not just a collection of good intentions, designed to make politicians look good, but to be quickly forgotten in the archives of history. Indeed, its initiators have given themselves the means to achieve their ambitions. In addition to a European climate law that will strengthen the legal framework, the project provides for EUR 1,000 billion in investments over the next seven years, as well as a EUR 750 billion subsidy plan in order to rapidly stimulate European economies that have been damaged by the COVID-19 pandemic.
The expected infrastructure boom
With the objective of reducing net greenhouse gas emissions (mainly CO2) to zero, it is natural that the first beneficiary is the energy sector. Indeed, the Green New Deal plans to give priority to energy efficiency and to base energy production on renewable sources. As a result, wind energy and photovoltaics are ideally placed to become the technologies of choice for the recovery plan, especially as an additional EUR 260 billion of investment per year will be needed to reach the target by 2030.
Construction and renovation will also benefit fully from the planned subsidies and investments, with renovation rates for public and private buildings expected to at least double, especially in social infrastructure. This should lead to a wave of modernisation work in social housing, schools and hospitals. For new buildings, the focus will be on energy efficiency and on compliance with the principles of the circular economy.
Transport infrastructure is also expected to get a large share of the pie. In order to make them more efficient and cleaner, investments should focus on automated mobility and intelligent road traffic management systems. In addition, a modal shift from heavy goods vehicles to rail and inland waterways is expected.
Unlisted infrastructure – the ideal vehicle for institutional investors
Investors have many ways to “play” this particularly buoyant theme. While shares in utilities and construction companies, clean vehicle and rail equipment manufacturers are logical – but often expensive – ways of benefiting from this European windfall, institutional investors would do well to take a closer look at unlisted solutions, such as specialised direct investment funds, which are particularly well suited to the infrastructure sector. Indeed, the launch of new projects linked to the Green New Deal offers numerous opportunities in the sectors of mobility, renewable energy, social infrastructure, water and electricity distribution networks, as well as telecoms, with the installation of fibre optic networks and data centres.
Supported by governments’ desire to develop infrastructure as a counter-cyclical vector for long-term economic growth, unlisted funds also benefit from the budgetary constraints and the high level of debt in the European public sector, which favour the use of private financing.
And for an institutional investor, there are many other advantages to investing in specialised infrastructure funds. Firstly, unlike many investments which are increasingly virtual, infrastructure projects are tangible and respond to concrete needs. They contribute to improving the living and working environment, economic efficiency, or are part of a development and equipment dynamic for communities, companies, and more generally for urban, rural or mixed areas. These operations thus make it possible to sustainably boost activity, growth and economic development.
Apart from its societal interest, this market also has many attractions from a financial point of view. First of all, infrastructure projects offer stable cash flows, with volumes that are often guaranteed and predictable or even contracted over the long term. In addition, they are regulated or uncompetitive markets, with a physical or contractual monopoly.
In Europe, this type of investment also benefits from the willingness of governments to develop infrastructure as a counter-cyclical vector for long-term economic growth. In addition, there is demographic pressure, which requires new investments to renovate or expand infrastructure.
As the graph below shows, the European direct investment market is particularly active and attractive for the infrastructure sector, with more than 950 transactions concluded in 2021.
Source : Inframation, Quaero Capital
Wind power has the wind in its sails
As mentioned above, wind power will certainly be one of the big winners, supported by the EU’s commitment to achieve carbon neutrality by 2050. With 220 GW of generating capacity in 2020, or nearly 16% of the electricity consumed in Europe, it is already the second largest source of electricity generation in the EU, ahead of coal and natural gas. The International Energy Agency predicts that this energy source will become the leading electricity producer in Europe by 2027. According to Wind Europe, no less than 27GW of production capacity will have to be installed each year to achieve the 55% carbon reduction target by 2030, which still leaves good growth prospects for this sector.
Although its carbon impact is not zero, it remains significantly lower than other conventional fossil-based electricity generation. Wind power is scalable and cost-competitive, so it has the potential to appeal to governments, especially as it generates many tangible positive externalities in addition to reducing carbon emissions. First of all, it creates many jobs in rural areas that often lack them. Secondly, through the local taxes paid by the projects and the rents paid, it feeds the coffers of municipalities and provides a new source of income for landowners, especially farmers. Finally, it increases the energy security of countries by reducing their dependence on energy imports.
The Green New Deal is therefore a unique opportunity. Firstly, for our planet, which should breathe easier with a few degrees less and no carbon emissions. Secondly, for the European project, which finds here a new momentum allowing its members to unite under a unifying banner. Finally, for investors, especially institutional investors, who will thus be able to find profitable projects with long-term recurring returns and which also have the potential to create value, while having a strong economic, social and environmental impact.
Infrastructure private equity at quaero capital – key facts
- EUR 875m of AuM
- 47 infrastructure projects closed since launch of activity in 2016
- Investments across several sectors in Europe including notably :
- 325+ MW of wind farms
- 10 MW of micro hydro
- Optic fiber networks in France and in the Baltics
- Social infrastructure assets (hospital and schools PPPs) in Spain, Austria, France and Italy
- Data-centres in the Baltics
- Water assets in Spain and France
(as of 22.02.2022)