Don't sleep at the wheel: Debt investments in transportation may be flying under the radar

At QIC, we believe the transportation sector offers steadfast opportunities and portfolio diversification benefits for debt investors that should not be overlooked. 

Telecommunications infrastructure and the energy transition — listen to any infrastructure fund manager, banker, advisor or direct investor in 2024 and you would be hard pressed not to believe that these two sub-sectors will dominate the attention — and capital — of investors for the rest of the decade and beyond.

The appeal of both is clear. High income economies are in the early to middle stages of replacing their power generation fleets with low carbon and renewable alternatives. Simultaneously, the ever-increasing demand for data delivery and processing, and the infrastructure to do so, is equally staggering to consider. 

But in the excitement to find opportunities in these spaces, it is easy to lose sight of another infrastructure sector, one that can deliver consistent opportunities, benefits from some of the same tailwinds and portfolio benefits. The roads, rails, bridges, ports, airports and related infrastructure that, instead of moving electrons or photons, move the people and goods that undergird the global economy. 

As direct lenders to infrastructure projects and businesses, we [QIC Private Debt] look to mobilise our capital and that of our limited partners into essential, capital-intensive businesses that we believe offer the most attractive combination of risk and return within our risk appetite. In our view, opportunities in the transportation space are proving to offer just as good, if not better, risk-adjusted returns for direct lenders than those in digital infrastructure or renewable power generation. 

So far in 2024, QIC's Private Debt Infrastructure platform has supported a new airport terminal that will allow an airport in a major North American city to open to commercial traffic for the first time, and has backed one of Europe's largest cargo port operators as it continues to modernise and transition its business to support the continent's economy. These follow other recent investments in businesses tackling EV fuelling infrastructure and climate-controlled logistics.

We believe EV infrastructure is proving an attractive driving force in investments in transport infrastructure.

Electricity and head production are the largest sources of human-produced global greenhouse gas emissions⁴ and are logical targets for emissions reduction efforts. However, the transportation sector is facing a transition of its own, both in direct carbon emissions and in the role it plays in moving fossil fuels from extraction sites to power stations around the world. Pollution from transportation has a direct impact on the communities in which we live, work and play⁵,often more so than pollution from power plants.

Around the world, governments are instituting policies that will fundamentally change our transportation infrastructure. Many of these policies are expected to generate a range of investment opportunities, both in traditional and emerging infrastructure sub-sectors. 

One of the highest profile transportation themes of the past half decade has been the electrification of light-duty passenger vehicles. As battery electric vehicles, hydrogen fuel cells and other hybrid technologies come to represent an ever-increasing percentage of the passenger fleet, mid and heavy-duty delivery vans, buses and semi-trailer trucks are only just beginning to transition. All of this will have a massive downstream effect on the infrastructure required to fuel and carry these vehicles.

In recognition of the infrastructure challenge inherent in both encouraging and supporting this transition, national, trans-national, state and local governments are using regulations and subsidies to support the build-out of charging infrastructure. In late 2023, the European Union published its regulation on the deployment of alternative fuel infrastructure (AFIR), which sets binding national targets for the development of alternative fuel infrastructure6.In the US, the 2023 Infrastructure Law and the Inflation Reduction Act (IRA) each directed billions of dollars into electrifying equipment and heavy vehicles at the nation’s seaports^{7, 8}.

Infrastructure developers are focused on developing fuelling solutions through fleet charging stations. Such stations will have maximum power draws similar to large data centres and can also house data infrastructure essential to autonomous vehicle operations. The prevailing business model sees these types of sites built, owned and operated by the infrastructure owner and then leased under long-term agreements to fleet users.

PwC projects that the number of charge points in the US is poised to grow from about 4 million to 35 million by 2030.⁹

This emerging sector builds on the opportunity already available in the transportation sector both in support of the energy transition and in the broad improvement and upkeep of global transport infrastructure. We expect the continued imposition of user fees to support the funding of transportation — especially in jurisdictions that currently rely on fuel taxes — and the use of asset recycling and public/private delivery models. The transportation sector will continue to offer an important and valuable part of infrastructure portfolios. It is one that we won’t be sleeping on.

Citations

1. CBRE North America Data Center Trends H2 2023 Report.
2. FTTH Council Europe Market Panorama 2024.
3. Google, Our commitment to climate-conscious data center cooling, 2022.
4. EPA Global Greenhouse Gas Overview 2024.
5. Environmental Health Perspectives, Healthy Neighborhoods: Walkability and Air Pollution, 2009.
6. Alternative Fuels Infrastructure Regulation, 2024.
7. 2023 US Infrastructure Law.
8. 2022 Inflation Reduction Act.
9. PwC, US electric vehicle charging market growth.