The watchlist: Emerging sectors for 2030 and beyond

The following is an extract from our recent publication: The future of private markets.

We believe there will be a growing number of opportunities created in sectors now considered niche, but that have the potential to scale meaningfully into the next decade and beyond.

Sectors of particular interest to us include:

Green hydrogen

Policy support for hydrogen has never been greater. While there is debate on the size of the addressable market amid competition from batteries and other energy sources, governments are increasingly supporting hydrogen production. In the UK alone, the government announced support for 11 major projects in December 2023[1].

Although it is starting from a low base, we expect hydrogen to play a greater role in the energy mix, particularly in sectors like fertiliser and steel production where there are high obstacles to decarbonisation and hydrogen is the only feasible low-carbon alternative.

We are more cautious on the viability of hydrogen in areas where electricity (batteries) or biomass can compete for market share, for example container shipping and both domestic and commercial heating.

That said, the industry is in the early stages of development. Projects with higher chances of success will likely include those with credible offtakers in place, concrete subsidies or other forms of support, and with sponsors whose strategic focus is hydrogen. As always, investment discipline is key.

Desalination

Water shortages are likely to become a systemic crisis in coming years, driven by climate change, evolving land use, and global population pressures. The Global Commission on the Economics of Water estimates that the world faces a 40% shortfall in fresh water supply by 2030, which could place two billion people under an acute water shortage[2].

Desalination can extend water supplies beyond what is available from the hydrological cycle, providing a steady, climate-independent source of potable water. The global desalination market is predicted to grow from $18bn in 2020 to $32bn by 2027, with demand concentrated in the most water-stressed areas, such as the Middle East and coastal areas of the US and Mediterranean nations[3].

Associated assets have attractive infrastructure characteristics. Multiple governments worldwide are pursuing public-private partnerships (PPPs) to reduce their cost of building desalination plants; Water Purchase Agreements are the foundation to PPPs as they provide guaranteed revenue typically lasting 30 or more years.

Countries able to improve their water security through desalination are likely to experience enhanced health and sanitation outcomes, reduced food prices, and the more robust development of industries that require large amounts of water.

However, there are environmental considerations: the process is very energy-intensive and requires decarbonised power to reduce its carbon emissions.

Natural capital

With an increasing number of organisations in a growing variety of sectors making net-zero commitments, there will be some industries where it is not possible to achieve carbon neutrality while maintaining activity and output. In these situations, carbon credits will be required to offset the impact of these hard-to-abate emissions. McKinsey has estimated that demand for carbon credits, currently valued at c.$2 billion, could be worth upwards of $50 billion by 2030, with consensus forecasts indicating the price per tonne of carbon will increase at a CAGR of 5.5% between 2023 and 2027[4].

Nature-based climate solutions provide a potential opportunity to generate verified carbon credits by reducing emissions or sequestering carbon from the atmosphere, ultimately supporting asset owners in meeting their targets. Some assets can provide additional flexibility and risk diversification via direct revenue generation, for example the responsible harvesting and selling of timber.

The IUCN estimated that these nature-based solutions can contribute up to 30% of the climate change mitigation required to meet the 2030 goals outlined in the Paris Agreement[5].

Nature-based climate solutions include peatland restoration, afforestation (the reversing of deforestation), and regenerative agriculture that prioritises sustainable techniques. They could enable investors to deliver a positive impact on the environment alongside financial returns.

Retirement communities

Senior housing provides homes suitable for the needs of an ageing population, ranging from independent living to 24-hour care. There is an emphasis on safety, accessibility, adaptability and longevity that many conventional housing options may lack. We anticipate that an increasingly ageing population will create opportunities for specialist senior accommodation alongside age-appropriate healthcare and lifestyle facilities.

The market for global retirement communities is expected to grow from $189.3 billion in 2020 to $285.1 billion in 2025: a CAGR of 8.5%[6].

We would highlight the UK as an area of particular growth potential, as there has been relatively limited supply/adoption so far compared to other markets. In the UK, only c.1% of over-65s in the UK live in retirement communities, a markedly lower rate than the 6.5% exhibited in the US and 5.5% in Australia[7]. This shortage is reflective of UK planning challenges and embedded supply/demand imbalances across British housing. It’s also likely to worsen: Knight Frank has forecast that in the UK the number of senior housing units per 1,000 individuals aged 75+ is to drop to 120 by 2025 –down from 137 in 2010 and 128 currently[8].

Conclusion

“In the long run, we are all dead”. So wrote John Maynard Keynes, one of the most influential thinkers in all economics, in his 1923 'Tract on Monetary Reform'.

In that spirit, there has always been a danger that megatrends are perceived as factors that matter tomorrow and not today. Investors will often guiltily put them on the back burner, knowing that they are important but allowing a lack of urgency and confidence to prevent them from incorporating them in their strategies.

However, change is accelerating. In just the past decade, in some countries we have seen the e-commerce revolution undercut the role of retail property. The office property sector is arguably undergoing a similar transition now, and allocations to it are increasingly being replaced by investments in residential and industrial property.

In infrastructure, renewable energy generation has emerged as a material asset class, significantly displacing the role of fossil fuel-related assets in many investors’ portfolios. In parallel, private credit has emerged as a major asset class, partly boosted by long-term trends in banking regulation that have opened up opportunities for investors.

In this light, we believe investors should consider constructing their portfolios to align with these megatrends.

Here we have set out a number of specific implications for different sectors and asset types – there will be many more. We will continue to deepen our analysis and share our thoughts on where both the potential risks and opportunities lie for investors willing to consider their portfolios in the long run.

The above is an extract from our recent publication: The future of private markets.

[1] Source: https://www.gov.uk/government/news/major-boost-for-hydrogen-as-uk-unlocks-new-investment-and-jobs

[2] Source: https://watercommission.org/wp-content/uploads/2023/03/Turning-the-Tide-Report-Web.pdf

[3] Source: Renub research; Desalination Market, Size, Global Forecast 2022-2027, Industry Trends, Growth, Insight, Impact of COVID-19, Opportunity Company Analysis

[4] Source: https://www.mckinsey.com/capabilities/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge

[5] Source: International Union for Conservation of Nature, 2023. https://www.iucn.org/our-work/topic/nature-based-solutions-climate

[6] Source: Altus Market Research, Retirement Communities Global Market 2022

[7] Source: https://www.savills.co.uk/research_articles/229130/325256-0

[8] Source: https://content.knightfrank.com/research/2285/documents/en/seniors-housing-development-update-2022-9176.pdf

Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass.