Revisiting the lessons of 2022-2023

The following is an extract from our 2025 global outlook.

In 2024, while total returns remained resilient on average, fundraising and transaction volumes remained under pressure, likely due to the elevated interest-rate environment. Infrastructure valuations stabilised, albeit at a somewhat subdued level compared to historical averages. Given the US election result, our view is that inflation and interest rate trajectories will remain crucial for infrastructure capital flows and valuations in 2025.

Amid growing uncertainty, investors will likely keep lessons learned from the 2022-23 period front-of-mind. During this time of elevated inflation and rising rates, infrastructure assets with resilient, inflation-linked cash flows underpinned by structural tailwinds continued to perform well. The uplift in earnings growth in most instances compensated for the impact of rising rates on capital returns.

Digital and clean energy sectors remain key areas of growth, in our view. Nuances, however, are emerging with respect to their earnings and growth potential.

Clean energy

Renewable valuations and growth prospects are more subdued, coming under fresh pressure following the US election. The main concern following the election, in our view, is the prospect for higher costs pressuring new project economics for new clean energy assets in the US due to possible tariff hikes and IRA subsidy rollbacks (for more, see Aanand’s section). While the risks are very real, we still expect clean energy demand to be boosted significantly due to strong growth in power-intensive data centre capacity in the US. Wind and solar remain among the cheapest forms of new capacity in the US and many key markets globally.

Lower clean energy demand in the US could put downward pressure on wind equipment prices. In the short term, that could be seen as beneficial for European wind projects, which may benefit from lower costs. However, equipment suppliers are operating with stretched balance sheets and low margins. We believe that longer-term, sustainable cost declines will require a stable and healthy supply chain.

Digital infrastructure 

Digital Infrastructure bucked the broader trend of falling capital flows and transaction volumes in 2024. As artificial intelligence-related (AI) growth is expected to accelerate, we expect the demand for digital infrastructure assets to remain robust in 2025. Given the hard constraints on available asset supply, we believe the demand-supply imbalance should continue supporting asset pricing and capital flows.

The insatiable demand for data has driven data centre power capacity forecasts towards at least doubling by 2030.[1] With record-low vacancy rates, rising construction costs, power supply constraints, and Big Tech signalling further AI infrastructure spending, data centre rental growth is expected, particularly in primary markets. The advance of AI is also providing tailwinds to fibre, with generative AI expected to require at least 10 times more fibre connections within data centres than is traditional.[2] But the AI tailwind is not without risk, in our view, with geopolitical tensions surrounding chip manufacturing becoming increasingly evident and an equivalence forming between national security and data centre power capacity for AI.[3]

With the rapidly evolving landscape and concerns on cybersecurity and secure communications, we see a deglobalisation of data through the rise of data and AI sovereignty.[4] This could, in our view, drive relatively greater growth of digital infrastructure in Europe. Despite EU regulations on AI, we expect the technology, as well as cloud migration and data sovereignty, to drive a strong net positive demand in Europe.

Finally, we see the data centre buildout aligning with environmental, social and governance targets, suggesting greater regulation on power efficiency and increasing renewables developments to come, particularly in Europe. The balance between fully embracing AI’s capabilities while ensuring safety, security, and adhering to climate targets will be central to the future of digital infrastructure development, in our view.

The above is an extract from our 2025 global outlook.

[1] AI power: Expanding data center capacity to meet growing demand | McKinsey
[2] Corning and Lumen Reach Supply Agreement on Next-Generation Fiber-Optic Cable to Support Data Center AI Demands - Aug 1, 2024
[3] Opinion: New energy sources for AI, data centers are vital to U.S. national security – MarketWatch; Memorandum on Advancing the United States’ Leadership in Artificial Intelligence; Harnessing Artificial Intelligence to Fulfill National Security
[4] Considerations regarding Sovereign AI and National AI Policy, November 2024