Our evolving investment environment has driven a step-change higher in inflation outcomes and volatility since 2020. Multipolarity, populism, demographics, climate change, and new technologies are complicating the outlook and increasing the value of true inflation resilience.
Key takeaways
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Many diversified portfolios have moved beyond a simple 60/40 mix of listed equities and bonds. Yet allocations to alternatives can still be uneven. Property, infrastructure and asset-backed finance may be modestly represented relative to their potential contribution to income, real-economy exposure and differentiated return drivers.
The case for a strategic allocation is not that real assets are rate-proof, or that investors should increase illiquid exposure indiscriminately. Higher funding costs and discount rates have reset valuations and widened the gap between strong and weak assets. But a well-constructed allocation can broaden a portfolio’s foundations: property links capital to rents and replacement costs; infrastructure to essential services and long-dated cash flows; and asset-backed finance to contractual carry (carried interest) and repayment priority.
This paper follows a practical sequence:
The renewed interest in real assets reflects our secular outlook for a more uncertain investment environment rather than a short-term thematic shift. Inflation volatility, geopolitical disruption and less-reliable equity/bond diversification have made it harder to rely on a conventional mix of financial assets alone.
Energy markets remain exposed to geopolitical shocks and underinvestment in networks and transmission. Construction costs, labour shortages and planning constraints have altered the supply outlook for parts of the property market. Meanwhile, governments and businesses face a large capital-spending task: upgrading power networks, building storage, strengthening energy security and maintaining essential infrastructure. That investment requirement sits alongside greater policy uncertainty, as governments across the political spectrum show a greater willingness to intervene in pricing, regulation, taxation, planning and subsidy frameworks in pursuit of affordability, security and distributional objectives.
The investable consequences of digitalisation are also increasingly physical. BlackRock estimates that global data centre demand could grow at a 20% annual rate through 2030, requiring around USD 1.5tn of investment, while the electricity required to power data centres could rise to two to four times current levels. This reinforces the case for looking beyond generation towards grids, storage, network capacity and power resilience.
These thematics around energy security, supply constraints, construction costs and the renewal of essential infrastructure reinforce the case for exposure to the real economy. At the same time, government intervention is increasing, as mentioned above.
For wealth portfolios, the question is not whether equities and fixed income remain important. They do. It is whether the portfolio has sufficient exposure to additional sources of income, contractual cash flows and real-economy activity for a world in which inflation, rates and growth may not move in familiar patterns.
Property returns are shaped by rental growth, vacancy, lease structures, development supply, tenant quality, financing conditions and capitalisation rates. A logistics facility with high occupancy and embedded rental growth has little in common with an office building facing structural vacancy risk; residential, industrial, retail and alternative property can each respond differently to the same macroeconomic event.
Investors should assess property through four dimensions: sector, strategy, capital position and vehicle. Sectors include residential, industrial and logistics, office, retail, hospitality, and operational or alternative real estate such as student accommodation, healthcare, life sciences and data centres. Strategy ranges from stabilised, income-oriented core assets to core-plus, value-add and opportunistic approaches with increasing leasing, development, leverage or execution risk. Capital position distinguishes equity from debt, while vehicle distinguishes direct, listed and private ownership.
Infrastructure is similarly diverse. Its portfolio role depends less on the label and is driven more by its sector, strategy, revenue model, position in the value chain, and the duration and indexation of its cash flows.
Core infrastructure generally comprises mature operational assets with regulated, contracted or availability-based revenues – payments for making an asset or service available to an agreed performance standard, rather than for the volume of use.
Core-plus and value-add strategies introduce progressively more growth, volume, merchant, construction or operational-improvement exposure.
Regulated, contracted and availability-based assets may offer relatively visible long-term cash flows; toll roads, ports and airports depend more on traffic and throughput.
Merchant renewables, storage and other market-exposed assets are more sensitive to power prices, congestion and input costs.
Policy can materially affect outcomes through pricing and return regulation, concession terms, planning, tax, subsidies, competition rules, environmental requirements and affordability measures. Even regulated or indexed revenues remain exposed to discount rates, risk premia, capital expenditure, physical resilience and the durability of the relevant regulatory or contractual framework.
As we wrote in our May 2026 Observation, asset-backed finance is a form of private credit, not real-asset equity. In this piece, it is included alongside property and infrastructure because this form of asset-backed lending is distinct. This is due to the fact that these loans are secured against identifiable real assets and/or serviced by their cash flows. This includes real estate and infrastructure debt, where repayment depends on collateral value, operating income, contractual revenues or a combination of these.
It can provide an alternative or complement to property and infrastructure equity. Equity participates directly in income growth and valuation upside; asset-backed finance emphasises contractual carry, repayment priority and a potentially more defined route to capital return. Both remain exposed to the same underlying asset fundamentals and economic rents, but from different positions in the capital structure.
Security need not take the form of a mortgage. Infrastructure and project-finance lending may be serviced by ring-fenced project cash flows and supported by security over assets, contractual rights, accounts and shares. The relevant underwriting questions are the resilience of the revenue model, the enforceability of the security package, the repayment source and the lender’s position in the loss-absorption waterfall (the order in which equity and debt investors bear losses if asset income or values deteriorate).
| Characteristic | Property or infrastructure equity | Asset-backed finance |
| Claim on cash flows | Residual claim; participates in income growth, operational upside and asset-value appreciation | Contractual claim; typically receives a fixed or floating coupon and repayment of principal |
| Position in the capital structure | Typically bears first loss | Generally ranks ahead of equity, subject to the terms and enforceability of the security package |
| Upside and return profile | Greater participation in income growth and valuation upside | Gives up much of that upside in exchange for contractual carry and repayment priority |
| Duration and capital velocity | Often a longer-hold, more open-ended exposure | Has a contractual maturity and may return or recycle capital more quickly |
| Principal risks | Income deterioration, valuation decline, leverage and exit risk | Borrower default, refinancing, covenant, documentation, collateral and recovery risk |
| Shared exposure | Underlying asset fundamentals, economic rents and market conditions | Underlying asset fundamentals, economic rents and market conditions |
Both forms of capital are exposed to the same underlying economic rents and asset fundamentals. The difference is how that exposure is structured, the degree of upside participation, and where each investor sits in the loss-absorption waterfall – that is, the order in which equity and debt investors bear losses if asset income or values deteriorate.
A portfolio lens: duration and cash flows
Property and infrastructure can be understood through a bond-market lens, occupying different points along the interest-rate curve. Property is often closer to the short end: values can respond relatively quickly to cash rates, debt costs, financing availability, leasing conditions and capitalisation rates. Long-income property, typically supported by long weighted average lease expiries (WALEs) – meaning the average remaining term of its tenant leases – and contractually indexed rents, may have longer-duration and potentially inflation-linked characteristics.
Infrastructure is often closer to the long end: regulated, long-contracted or explicitly inflation-linked revenues can give an asset long-duration (or in some cases, inflation-linked) characteristics, alongside real-asset and equity risk. This is a useful heuristic rather than a rule: the relevant questions are the duration, indexation and certainty of the underlying cash flows.
The practical value of these distinctions is not taxonomy for its own sake. They determine what a real-assets allocation adds to the wider portfolio: the source and reliability of income, sensitivity to rates and inflation, exposure to economic growth, and the liquidity and loss profile an investor is accepting. The aim is to combine complementary characteristics that improve the portfolio as a whole. In constructing client portfolios, we consider these dynamics through the lens of our proprietary multi-asset risk factor framework.
A strategic real-assets allocation should start by deciding which of those characteristics the portfolio needs most. The allocation can then be structured to meet that objective within the investor’s liquidity budget and governance capacity.
Income: Property rents, infrastructure payments and lending income can supplement bond coupons. Their durability depends on lease and contract terms, regulatory settings, tenant or counterparty quality, leverage and the sensitivity of demand to economic conditions.
Inflation linkage: Rents and regulated revenues may rise with inflation through contractual indexation or economic pricing power. Neither is assured: escalation can be capped or delayed, and pass-through can be limited by regulation, competition or customer affordability. Inflation-linked income also does not prevent valuations from falling as discount rates rise.
Diversification across economic drivers: Exposure to essential services, rental markets, regulated revenues and replacement-cost dynamics can introduce return drivers beyond financial-market pricing and corporate earnings.
Long-term structural investment needs: Longer-term thematics are multi-faceted. For example, the energy transition is not only about generation. It also requires grids, interconnectors, storage, stability services and transmission infrastructure. These needs can create investable opportunities, although their quality varies materially.
| Private asset class | Principal potential role | Primary return sources | Diversification considerations | Key qualifications | |
| Private real estate equity | Income and capital appreciation | Rents, occupancy and rental growth, asset management, and valuation change | Diversify by sector, geography, tenant, lease structure, strategy and leverage | Exposure to vacancy, supply, operating costs, financing conditions and cap-rate movement | |
| Asset-backed finance: real estate and infrastructure debt | Contractual income, repayment priority and potential capital recycling; complement to real-asset equity where underwriting is conservative | Interest income, fees and repayment of principal; recovery value in stress | A different capital-structure exposure, but still tied to the relevant property or infrastructure markets, collateral and cash flows | Seniority depends on collateral value or security package, loan-to-value (LTV) or debt sizing, covenants, revenue resilience, sponsor support, maturity and workout capability | |
| Private infrastructure | Income, potential capital appreciation and essential-service exposure | Regulated, contracted, availability-based, volume-linked or merchant revenues | Diversify by sector, geography, counterparty, regulatory regime and revenue model | Discount-rate, regulatory, volume, construction, technology and merchant-price risks vary materially |
These characteristics are not automatic. Inflation linkage, income durability and diversification depend on the underlying cash flows, contractual protections, leverage and valuation. Asset-backed finance can provide contractual income, but remains exposed to borrower performance, refinancing conditions and collateral value. The portfolio benefit comes from combining exposures with genuinely different cash-flow drivers and risks.
A strategic allocation is not a blanket buy recommendation. Higher rates and financing costs have increased dispersion across property, infrastructure and asset-backed finance. The stronger opportunities combine resilient cash flows, credible protections, prudent leverage and disciplined entry valuations; the weaker rely on optimistic growth, weak contractual or regulatory support, or refinancing and exit conditions that may not hold.
The practical implication is to focus on both the underlying source of return and the quality of the manager or partner through which it is accessed: sector, location and lease structure in property; revenue model, maturity and regulation in infrastructure; and collateral, capital position and repayment source in asset-backed finance. Manager selection should assess sourcing capability, underwriting discipline, operational expertise, alignment of interest, leverage, governance and the ability to manage assets through stressed conditions.
Listed and private structures provide different access routes to similar real-economy exposures.
Listed exposures offer daily pricing, liquidity and rebalancing flexibility, but can be sensitive to equity-market sentiment and may trade away from underlying asset values. Private exposures can provide access to direct assets, specialist lending and operational or development strategies, but involve longer lock-ups, model-based valuations and greater reliance on fund terms, leverage, governance and manager capability.
Evergreen or open-ended structures that allow investors to subscribe and seek redemptions periodically (rather than trade daily) sit between these approaches. They do not change the liquidity of the underlying assets, and redemptions may be subject to notice periods, gates, queues, pricing adjustments or manager discretion, particularly in stressed markets.
Real assets are not a guarantee against inflation and should not be assumed to replicate the defensive role of high-quality fixed income. Even index-linked or regulated revenues can be undermined by rising discount rates, changing regulation, weaker demand or wider risk premia; property values can fall as cap rates expand, and infrastructure valuations can reprice when required returns rise.
Nor do real assets generally offer the same liquidity, certainty of contractual payments or convex downside protection as dedicated defensive assets and hedges. They can broaden a portfolio’s income and economic exposures – and, in selected cases, complement its duration profile – but they do not remove the need for liquidity, high-quality defensive assets, diversification and active risk management.
The composition of the real-assets building block should reflect investor objectives. Property equity can provide exposure to rental income and long-term appreciation; infrastructure can provide exposure to essential services and, where relevant, regulated or contracted long-duration cash flows; and asset-backed finance can provide contractual carry, repayment priority and potential capital recycling. The balance should be set against the portfolio’s existing growth, duration, credit and liquidity exposures, not against a generic alternatives target.
Diversification within the sleeve matters as much as the allocation to it. Investors should test whether holdings depend on the same sectors, tenants, counterparties, regulatory settings, refinancing markets or valuation assumptions, and whether those risks can be managed during a period of market stress.
The case for real assets is not a generic allocation to an “alternatives” label, nor an automatic call to increase illiquid exposure. It is a deliberate decision to address gaps in a conventional portfolio by adding complementary sources of income, duration, economic exposure and capital-structure risk, where doing so improves the resilience of the portfolio as a whole.
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