From data centers to waste streams: Infrastructure investments are more diverse than ever. The company Viridor Energy, for example, uses waste as a resource for environmentally friendly energy.
The infrastructure asset class has changed fundamentally in recent years. While the focus used to be on traditional sectors such as airports, roads, and energy and water suppliers, the spectrum is now much broader. New investment topics such as digitalization (data centers, 5G, fiber optic networks), renewable energies, charging infrastructures for electric vehicles and smart metering are becoming increasingly important. Infrastructure is no longer a homogeneous market. The variety of sectors and opportunities is enormous.
Insight into the sector: Viridor Energy – turning waste into electricity
Switzerland is regarded as a role model in dealing with waste. More than half of municipal waste is recycled. The rest is used to generate energy in modern waste incineration plants according to the EfW – Energy from Waste – principle. Landfilling with untreated waste has been prohibited by law since 2000. This ensures resources and energy are used sustainably.
The situation is different in Great Britain and Northern Ireland. Despite political goals and increasing environmental awareness, around 10 million tons of waste still end up in landfills every year . The necessary infrastructure for recycling and energy recovery is still inadequate in many places, resulting in high greenhouse gas emissions.
This is where Viridor Energy comes into play, an investment that Zurich Invest has been supporting since 2022 as part of a co-investment program of the Zurich Investment Foundation. Viridor Energy currently operates 12 fully operational EfW plants, processes around 3.5 million tons of waste per year (around 22 percent of the UK market) and generates over 2,100 GWh of electricity, enough to power the equivalent of 778,000 homes. Revenues are generated, on the one hand, from long-term contracts for waste acceptance, and on the other hand, from the sale of the electricity generated. A large proportion of the contracts are inflation-indexed and have been concluded with creditworthy partners.
What makes the investment attractive?
- Essential service and leading market position: Waste disposal is a system-relevant service. The construction and operation of modern plants require considerable investment and extensive approval processes. This ensures long-term stability and predictability on the market.
- New and durable assets: On average, the systems are only five years old and have an expected service life of over 50 years – this enables stable, long-term yields.
- Stable and predictable cash flows: Around 82% of income is hedged by contracts with an average remaining term of 15 years, which reduces volatility.
- Inflation protection: Most contract volumes are linked to price indices. This protects income in times of high inflation.
- Creditworthy counterparties: Predominantly public institutions and large companies as contractual partners minimize the risk of default.
- Economies of scale and diversification: Viridor benefits from economies of scale and risk diversification across 12 investments in different locations.
- Regulatory support and ESG focus: Measures such as the British "landfill tax" and CO₂ reduction targets promote the business model. Viridor is also investing in increasing efficiency, carbon capture and storage (CCS), and the circular economy, and it aims to become climate-neutral by 2040.
Diversification as the key to success
Although a single infrastructure investment may appear highly attractive, the right portfolio setup is crucial. In the infrastructure area, broad diversification across sectors and countries protects against political and regulatory changes. Asset managers should also diversify carefully. This is because the investments are illiquid, and once a capital commitment has been made, it cannot really be withdrawn. Finally, the individual investments should be coordinated with one another and not be subject to excessive concentration risks.
Co-investment approach: Flexible, diversified, efficient
With a co-investment approach, investments can be selected in countries and sectors where they are currently most attractive. They can also be optimally coordinated with each other. In addition, the managers with the best experience and expertise in the relevant region and sector can be selected for the individual investments. In contrast to a fund-of-fund approach with two levels of fees, co-investments also offer manager diversification, but are often free of charge. The co-investment approach thus combines an optimal portfolio setup with high cost efficiency. Zurich Invest Ltd has also been using this approach successfully since 2013.
