ARTICLE
9 January 2025

The Evolution Of Infrastructure: How Social Infrastructure Is Redefining Investment Opportunities

RG
Ropes & Gray LLP

Contributor

Ropes & Gray is a preeminent global law firm with approximately 1,400 lawyers and legal professionals serving clients in major centers of business, finance, technology and government. The firm has offices in New York, Washington, D.C., Boston, Chicago, San Francisco, Silicon Valley, London, Hong Kong, Shanghai, Tokyo and Seoul.
In recent years, the private capital market has experienced a groundswell of interest in infrastructure. Many large institutional investors have either developed dedicated infrastructure platforms...
United States Real Estate and Construction

In recent years, the private capital market has experienced a groundswell of interest in infrastructure. Many large institutional investors have either developed dedicated infrastructure platforms through which they invest in these strategies, or have opted to apply funds from other umbrella platforms—such as private equity or real estate—towards infrastructure and infrastructure-related opportunities.

At Ropes & Gray we work with a wide variety of clients, many of whom invest in the infrastructure space. One of our main takeaways from engaging with these clients over the years is that "infrastructure"—and, in particular, what types of assets may or may not be suited for an "infrastructure fund"—can mean different things to different people. It is a malleable concept that has evolved over time; it can adapt and expand in order to meet new societal needs and, in turn, create new market opportunities.

In the most traditional sense, infrastructure can refer to roads and bridges, transportation and similar logistical services—the fundamental and physical building blocks that enable people, goods and services to move and function. In today's day and age, infrastructure can also be applied in the digital context and refer to digital infrastructure: data centers, AI functionality, renewal energy, power sources. And, it can extend even further to what several in the industry are now referring to as "social infrastructure".

What is "social infrastructure"?

Like "infrastructure" itself, the term "social infrastructure" is expansive and can be used to refer to a wide range of asset types and strategies. In general, it refers to services or facilities that serve a social function and provide some type of necessary amenity to a population.

Healthcare, education and assisted living are some of the most common examples of social infrastructure investment opportunities and even those cast a wide net. Student housing, childcare, animal care and veterinary clinics and funeral and crematory services are all examples of asset types that we're seeing grouped into this "social infrastructure" category.

Today, all of these are the focus of many participants in the private capital market, including those with an infrastructure focus—similar to the profile of more traditional infrastructure opportunities, these investments offer the potential for long-term, relatively stable cash flow opportunities given ongoing social need and therefore can prove to be resilient despite market challenges.

But the phrase "social infrastructure" doesn't just stop there. Clearly flexible in its application, some investors have used the nomenclature to capture an even broader array of investment opportunities from ESG, to innovation and research, to climate, public safety and even affordable housing. The point is that it is an incredibly malleable term and one that various players in the market are now employing in order to harness many investors' increased interest in—and willingness to apply funds towards—"infrastructure" investing.

In many ways, it seems that the market's increased intrigue around "infrastructure" has paved the way for some rebranding of investment opportunities that were already there—healthcare, education, and assisted living, to name a few, have always been areas of interest by private capital providers, but now under the new guise of "social infrastructure" have sparked new focus and interest by others in the market, specifically including those seeking out infrastructure-related opportunities.

What are the key drivers behind the focus on "social infrastructure"?

The question arises as to whether there is really anything revolutionary happening here, or whether the allure of social infrastructure is just a matter of taking something that already existed and calling it something different. There are, however, a few other key drivers that are attributing to the increased focus amongst several investors on social infrastructure opportunities.

  • First, people are living longer than they ever did before—we live in a world with an aging population and, in light of that "silver tsunami", there is a constant and growing need for senior living, healthcare and hospice facilities and other services dedicated to the elderly.
  • Second, the world continues to get more expensive—as consumer costs rise and the costs to run a business similarly increase, there is a greater need for capital to help support these businesses and facilities. Historically that is a delta that may have been filled, in part, by public subsidiaries but with public funds equally strapped, there's been an increased opportunity for the private sector to come in and fill the gap.
  • And, finally, and as mentioned earlier: these are generally longer-term, relatively stable assets that provide a fairly steady stream of cash flow—of course, also with hope of turning a profit—so they may be particularly interesting for investors who are otherwise attempting to combat what has otherwise been a fairly choppy market.

Who are the players participating in social infrastructure?

Market players in the space run the gamut. Some institutional investors are participating in social infrastructure opportunities through their general infrastructure fund strategies. Others have developed social infrastructure-specific platforms or initiatives specifically focused on the social infrastructure space. Whether through a specific social infrastructure platform or a broader infrastructure strategy, infrastructure investors seem particularly well-suited for these social service-type of assets given they typically have a longer investment horizon than other types of capital—i.e., they're situated and prepared to play the long game, which is often what these types of assets require, rather than turning a quick profit and exiting.

But going back to the earlier point about a simple re-branding of an existing asset class, there have been players in other areas of the market who have been participating in these types of investments for years and are continuing to do so now, ranging from private equity, to real estate to life sciences. For example, coming from the real estate perspective, we've done several transactions over the last few years for clients looking to invest in joint venture partnerships to acquire, develop and manage student housing facilities and senior living, and our clients in our healthcare practice would probably say that social infrastructure has been their—and their clients—bread and butter for decades.

Are there any unique risks that investors should bear in mind when considering social infrastructure investments?

There are some in the market who are weary of a social infrastructure strategy. After all, some of these investments target some of society's most vulnerable populations, including children, elderly and those in need of healthcare. With this comes a more specialized skillset, perhaps higher operational—and clinical—cost and, perhaps, greater risk for reputational harm if things go south. But as long as an investor pulls together the right team and resources to meet these risks head on, we think many would say that the strategy has the potential for the benefits to outweigh the risks.

What might a deal in social infrastructure look like on the legal side?

From a legal perspective, these deals offer us an exciting opportunity to bring together a multidisciplinary team, as social infrastructure investments will often require expertise in many areas including real estate, healthcare and life sciences, regulatory and antitrust, just to name a few. We would be remiss if we didn't take this opportunity to say that this is one of the reasons we here at Ropes & Gray consider ourselves to be uniquely well positioned to represent clients in connection with such investments, given our agile ability to work and coordinate across practice groups in pursuit of a unified goal.

What does 2025 hold in store for social infrastructure?

While impossible to truly predict the future, we think that this is an area where we are going to see continued focus by institutional investors and likely a steady increase of activity in the space. While we hopefully are nearing the end of what has been a choppy moment in the market for many, we don't seem to be completely on the other side yet and these assets appear to offer great potential for long-term, relatively stable cash flow to meet never-ending—and growing—social need.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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