Alma Recurrent Energy Infrastructure Income Fund

Market Review and Outlook

In a 2024 monthly, we analyzed the railroad sector’s 2000s-era turnaround as a model for energy infrastructure (EI). Rails were over-indebted and under-earning before finding discipline in the 2000s. By 2010, a long-term bull market had begun. Two key lessons: 1) capex restraint can fuel long-term value creation; 2) markets can take years to recognize good behavior. In 2026, EI follows the railroad playbook, with high profitability and modest capex. In contrast, utilities are not learning from previous real asset cycles: utility profitability is falling, debt is rising, but asset growth is at all-time highs. Utility valuations remain elevated, suggesting markets are slow to recognize bad behavior too.

During the month of June 2026, the Alma Recurrent Energy Infrastructure Fund generated net returns of -0.79%.

Today, investors are focused on artificial intelligence (“AI”), trade wars, and conflicts in the Middle East and Ukraine. Despite these volatile headlines, we believe that capital-intensive “real asset” and “infrastructure” investing remains governed by several unchanging principles.

1) Valuation creates a temptation to grow. Growth spending (capex or M&A) often rises and falls with valuation, although disciplined managements or regulatory obstacles sometimes depress growth even in the face of higher valuations. But on average, higher valuations typically = higher growth and more capital spending.

2) Returns on capital often move inversely to growth. High-growth companies often struggle to maintain high returns. Capex in progress is “fallow capital” (not generating returns) during construction. For infrastructure, this impact is even more dramatic as capital stays “fallow” during 3-6 year construction timelines. Low returns and high growth often necessitate significant debt issuance.

3) Returns drive valuation… with a lag. As noted in 2024, railroads saw returns improve in the late 2000s, but valuations improved in the 2010s. For utilities, returns have been falling for years, but valuations remain near the high end of historical ranges. For midstream, returns have been improving for years, but valuations have only recently exceeded long-term (25-year) averages.

As our framework predicts, high-growth utilities see falling returns, as low-growth EI and RR see high/rising returns

Railroad returns on invested capital (ROIC) have stayed in 10-12% range for much of the last decade, with ROIC hovering near 10% since the post-COVID boom of the 2021-22 period. Midstream returns have steadily climbed, with ROIC forecast to reach 11% in 2026, approaching peak 2022 levels, which were then viewed as a “one-off” given export profits during the initial phase of the Ukraine War.

Utilities, in contrast, have seen returns decline for much of the last decade, as utilities have generally shed higher-ROIC unregulated fossil fuel generation in favor of huge low-ROIC renewable buildouts. Utilities have continued to see returns sag as they have pursued aggressive growth as AI opportunities have beckoned.

Valuations allow companies to pursue growth, but do not force them to

As we’ve written here and elsewhere, high valuations encourage growth more than high profitability does. Sectors tend to grow faster when they are highly valued. However, valuation is not destiny. Highly valued companies can choose lower capex, slower growth and higher profitability – either by management discipline, or because of regulatory concerns or shifting industry dynamics. Railroads and midstream have both grown slowly in recent years. Utilities have grown rapidly. Moreover, railroads (low growth) and utilities (high growth) are both valued in the top 10% of 30-year valuation ranges; midstream has seen valuations improve from all-time lows in 2020, but valuations could continue to improve as midstream companies maintain prudent growth plans and high ROICs.

EI’s low growth, high returns and modest valuations are encouraging for future returns

Railroads have the cost of capital to pursue growth, but given the already concentrated industry and unappealing prospects around constructing new track, the industry remains in low-growth mode. Given low growth rates, returns should remain high, but given valuations at the 90th percentile of historical ranges, it’s arguable that these favorable growth and profit attributes are well understood. Midstream/Energy Infrastructure has now caught up to the railroads in return generation, and industry-wide asset growth continues at a low- to mid-single digit rate. Encouragingly, midstream remains valued near historical averages despite top-decile ROIC levels vs. history. The 25% unlevered valuation discount vs. railroads suggests >25% upside to fair value for equity valuations. Utilities remain an outlier in many respects, although they are once again the exception that proves the rule. We have noted that growth typically responds to valuation, not profitability – utilities support our thesis as current growth rates are at 25-year highs; meanwhile returns are near the bottom of the long-term historical range. With valuations at the 93rd percentile of historical ranges, utility investors seem to be betting that this time is truly different.