Data Centers Are the Wizards of Alts. Here’s What’s Behind the Curtain

Pay attention to the man behind the curtain. 

While data centers may have become Wall Street’s wizard of alts, there are other, perhaps more mundane, infrastructure opportunities that might deserve a closer look. Demand for energy infrastructure, which was flat for decades, is now growing again amidt the needs of artificial intelligence and the shift toward renewable energy. Unfortunately, our current grid is straining to keep up. That opens the door to a broader set of infrastructure plays that are easier for Main Street investors to access than in cycles past, giving advisors new tools to diversify client portfolios beyond the increasingly crowded data center trade. 

“We believe data centers are, at least today, somewhat overhyped,” said Irina Zilbergleyt, managing director at I Squared Capital. “They are attracting a tremendous amount of attention, which means a lot of capital is bidding for the same assets and driving up prices. If you win an asset in that environment, there is real risk you have overpaid.”

There’s No Place Like Alts

Developed countries have underinvested in infrastructure for decades, and it’s starting to catch up with them. “We’re seeing a tremendous investment again, somewhat tied to AI, but also because of the lack of upgrade of the infrastructure for a long time,” said Eric Gerster, CIO at AlphaCore Wealth Advisory. Transitioning to renewable energy like wind, solar, and hydropower requires costly grid upgrades, and while traditional US infrastructure often runs through government-bid contracts, private investors still have an opening. Abroad, it’s more direct: Gerster and Zilbergleyt both pointed to international governments selling assets like toll roads outright to private firms, guaranteeing investors a healthy return.  

Phil Blancato, chief market strategist at Osaic, broke down how he’s approaching exposure across client types: 

• For standard Main Street clients who need full liquidity, Blancato favors commodities funds over infrastructure funds. The two are closely linked (infrastructure can’t be built without commodities), but he says that infrastructure funds are often too broad and carry too much oil exposure, which he called a “fading commodity.”  
• Higher net worth clients should consider private equity or private credit funds, in order to invest directly in a physical product. 
• Mass affluent clients can get similar direct access through interval funds, which provide more liquidity, and which offer a level of access that wasn’t available during the last infrastructure boom. 

Slow and Steady. Advisors shouldn’t think of infrastructure as a total return play, and should make sure the product they’re in generates income, Blancato cautioned. “You do have periods of lackluster returns,” he said. “When you’re not seeing the boom happen immediately or [you’re in] the spheres where it ebbs and flows, having that income strand is key … You want to look at this as a long-term hold.”