Infrastructure: The Red Thread – Alternatives

Oil shocks and inflationary ripples

Hostilities in the Middle East (ME) are creating a supply-side shock that will weigh on growth through 2026 and beyond. Oxford Economics has revised down its global growth forecast by 0.4 percentage points¹ for the year. Oil prices as of 1 May are at USD 118 (see Figure 1), with six-month futures priced at USD 79.² Higher oil and gas prices will lift headline inflation directly and indirectly via broader business costs, pushing up core inflation. One-year inflation expectations in the US rose to their highest level since August 2022 in April,³ while eurozone inflation ticked up to 3%.

The ME region’s significance extends far beyond oil and gas. Constraints on fertilizer supplies during the growing season, alongside disruptions to aluminum exports, suggest that the economic effects are likely to persist beyond any eventual reopening of the Strait of Hormuz.

Impacts so far have been muted as ships that had left the Gulf before the Strait closed continued to make deliveries – markets further away will experience lagged effects. Depending on how events develop, we may see higher inflation across APAC, given the region’s greater dependence on oil and gas from the ME. The case for rate cuts has weakened materially, as the prospect of renewed policy tightening becomes credible. For Europe in particular, the current backdrop reinforces the strategic case for accelerating the energy transition in pursuit of greater energy security.

Figure 1: European brent and US WTI (USD per barrel, LHS) and oil ETF volatility index (RHS)

Source: FRED, Federal Reserve Bank of St. Louis, April 2026. Past performance is not a guarantee for future results.

Global technology mix

Data on the electrical power generation capacity across some of the largest economies illustrate just how reliant many still are on fossil fuel sources (see Figure 2). The white lines in the chart shows the aggregate generating capacity of these economies against the right axis. China is much further along the electrification path, with over 3.35 terawatts (TWs) of capacity, despite a lower share based on fossil fuels than the US, with 1.28 TW as of 2024. China has more than six times the generating capacity of India, a country with a comparable population.

Figure 2: Installed electrical generating capacity (GW, RHS) by technology share (%, LHS)

Source: IRENA, July 2025. Past performance is not a guarantee for future results.

While concerns about stranded asset risks of conventional power generation have waned in recent years, forecasted risks in future fuel prices, combined with equipment sourcing challenges for new assets, are shifting investment towards renewables. We believe recent events in the ME and the resulting volatility in global oil and gas prices could further hasten the energy transition and renewables investment.

Solar – the leading technology

Around 30% of electricity generated globally in 2023 came from renewables, up from 18% in 2000. Within that, 44% of renewable power in 2023 came from variable sources, mainly wind and solar, up from just 1% in 2000.4 Even before the pandemic, capital investment flows into renewable power generation averaged around USD 400 billion annually between 2015–2019, more than double the flows into unabated oil, natural gas and coal generation.5 Since 2022, renewables investment has accelerated and has overtaken investment into oil and gas upstream (prospecting and extraction, see Figure 3).

Solar remains the key driver of this expansion – global annual additions of solar capacity more than tripled in just three years, from 142 GW in 2021 to 453 GW in 2024.6 IEA projections for continued solar adoption suggest global installed capacity will rise from 2.26 TW in 2024 to between 8.07 TW and 12.50 TW in 2035, based on current policies and net-zero scenarios, respectively, representing a compound annual growth rate (CAGR) range of 13.7% to 17.3%. The IEA has consistently underestimated solar adoption in recent years, so forecasts may continue to be conservative.

Figure 3: Investment in renewable power generation vs. oil and gas upstream* (USD bn)

Source: IEA, World Energy Investment, 2025. *exclusive of power generation investment.

The investment case remains compelling, even in the US despite recent challenges in offshore wind, as data center developments drive energy demand growth to a higher gear, with AI hyperscalers willing to pay premiums for power. Renewables are benefiting from declining technology costs and shorter lead times. At the same time, the maturation of corporate power purchase markets has strengthened long-term offtake contracts, helping to de-risk revenues and support more stable return profiles.

Policy reprioritization

While decarbonization remains an important longer-term policy objective, energy security and affordability have moved to the forefront of government priorities in recent years. Solar is well positioned in that context. Its advantage as the technology with amongst the lowest levelized cost of energy, beside onshore wind,⁷ supports further rollout, just as European governments consider more favorable tax treatment of renewables to advance policy goals.

Despite these tailwinds, the variability of solar and wind power is the Achilles’ heel to further penetration into the generation mix. The intermittency of renewables is a key reason why capacity utilization factors for wind and solar are substantially below those of other generation technologies (see Figure 4). Wind technology has delivered improvements in capacity utilization factors over the last 20 years, but is still less than 40% of that of nuclear. However, technology has advanced to relax this constraint. The scaling of battery energy storage systems (BESS) in recent years is offering a new avenue for renewable generation’s continued growth.

Figure 4: Average capacity utilization factors (CUF) by power generating technology; 2000–22 (%)

Batteries rewiring constraints

BESS stores power when wind and solar output is high and release it when supply is low. This generates additional revenues through power price arbitrage strategies and via contracts that help stabilize the grid through frequency modulation, increasing grid resilience. Installed battery capacity rose from less than 1 GW globally in 2010 to 166 GW in 2024, after doubling from 2023 to 2024. Over USD 60 billion is estimated to have been deployed into the technology relatively evenly across North America, Europe, and China in 2025 (see Figure 5). This technology is expected to help transform how grids operate and facilitate phase two of the energy transition. BESS could also be instrumental in furthering the decoupling of carbon intensity from economic growth by facilitating continued renewable deployment via its ability to help manage intermittency.

Figure 5: Battery storage investment by geography (USD bn)

Source: US Census Bureau, October 2023. Past performance is not a guarantee for future results.

Economics are driving adoption, with prices dropping 20% in 2024, driven by price declines in lithium, nickel, cobalt and graphite, as well as fierce competition within China between competing manufacturers and growing scale economies. Despite price reductions, reliability and warranties continue to improve, benefiting asset operations and returns.

Further, the slowdown in electric vehicle (EV) adoption has seen EV battery manufacturing plants in the US retool towards production of BESS technology. IEA’s scenarios forecast installed battery storage capacity CAGRs of between 21.5%–29.6% out to 2035 (see Figure 6).

Figure 6: Forecast global battery storage capacity by policy scenario (GW hours)

Source: IEA World Energy Outlook, 2025. Past performance is not a guarantee for future results.

Energy security provides new impetus to transition

The increased incidence of negative power pricing in Europe in recent years serves to highlight the risk of potential overbuild for merchant renewable power generation. However, power purchase agreements (PPAs) continue to underpin revenues in contracted models. Further, the adoption of BESS will help flatten the peaks and troughs of intraday pricing, and is allowing more sophisticated hybrid revenue models to emerge.

Recent events in the ME have served to remind the world that intermittency is not just a feature of renewable power, but also of fossil fuels. This manifested in highly volatile prices and drove uncertainty about critical supplies. While supply can always be induced with higher prices, the downside risk is undermining investment at the margin, and, as the evidence here illustrates, much further. If higher oil prices do persist, relative to current futures prices, one could expect a resurgence of the off-shore wind sector – even expensive renewables are viable if fossil fuel sources remain even higher.

An ongoing reweighting of policy ambitions away from sustainability, which has been key to driving the energy transition so far, towards affordability and security, has collided with the rapid reduction in power generation costs and technological innovation in BESS that helps alleviate concerns about intermittency. For private capital, this means an evolution in return drivers, but the expertise to deploy and operate assets remains core to phase two of the energy transition.

Fundraising consolidation may widen multiple spreads

2025 witnessed a rush of mega-fund final closes, with aggregate capital raised surpassing the previous 2022 record (USD 219 billion vs. USD 188 billion, respectively), contrasting with the slower 2023/24 fundraising market. Capital consolidation trends continued, with five USD 10 billion-plus funds reaching final close, securing USD 95 billion. The share of capital raised by USD 5 billion-plus funds reached a record 62%. The risks of missing out on better value entry multiples in the middle and lower market have risen for LPs in these funds. Analysis of EBITDA multiples by deal values shows those below USD 250 million are, on average, considerably lower, with a consistent rise in multiples as deal values increase.

We expect the wave of mega-fund closings to intensify competition for upper-middle- and large-cap assets, widening the multiples gap vs. the lower-middle market. As exit paths for larger assets become increasingly dependent on IPOs, a broader, diversified portfolio of smaller assets may help avoid exit challenges longer term.

Evidence of long-term favorable performance is accumulating

Infrastructure’s long-term returns are compelling on an absolute return basis, beating global equities despite more than 30% lower volatility – even against an unsmoothed measure.⁸ MSCI’s recent 2025 USD return came in at 12.8%. In our view, the case for infrastructure is made all the more appealing when taking into account lower volatility and higher diversification potential.

Preqin analysis shows the asset class’s Sharpe ratio is higher than all other private and public asset classes.⁹ Further, correlation with global 60/40 portfolios is among the lowest (just behind natural resources) – an indicator of its strong potential for diversification benefits. This is all the more valuable given recent correlations between stocks and bonds linger between mildly positive to zero.

2025 deals market recovery aligns with multiples rise in H1

Infrastructure’s deal market recovery from the 2023 rate-rise-induced contraction continues. Data to 4Q25 reveals that the aggregate deal value of just general partner (GP)- and fund-acquired assets has surged back close to the 2022 peak in activity (93% of 2022 aggregate), despite significantly fewer deals (63%).¹⁰

We recently revisited our views on the return prospects of sectors across key markets in light of the recent events in the ME. See below for our latest views on how the current economic outlook will impact assets.

Private infrastructure sector performance outlook