We’ve been here before and we’ll almost certainly be here again (and again): as the asset class evolves, what exactly falls into the infrastructure bracket? Following Brookfield and iCON’s recent investments in two Canadian companies providing heating and air conditioning rental and maintenance services, among others, the time is right to revisit this question.
So, let’s get stuck in: is the leasing of heating and cooling systems to predominantly residential customers an infrastructure investment? For Brookfield infrastructure boss Sam Pollock, the answer is ‘yes’.
Calling Enercare, the firm Brookfield acquired, “a leading provider of essential residential energy infrastructure”, Pollock had this to say during the manager’s recent Q2 earnings call: “Enercare is a high-quality annuity-like business with a well-established market position. The business has been around for over 50 years and currently has about 1.2 million rental units. From installation, these assets provide revenues underpinned by long-term inflation-linked contracts over many years. Recurring revenues from equipment rentals and protection plans generate approximately 80 percent of the company’s revenue, resulting in predictable, long-term cashflows.”
There’s no doubt Enercare ticks many of the boxes you’d expect from a traditional infrastructure investment; but, importantly, it doesn’t tick all of them. For example, Pollock described Enercare as “a leading provider of essential residential energy infrastructure”, but one could immediately challenge how essential air conditioners and heaters really are.
On a criticality scale, they would certainly rank below the provision of water, transportation, electricity, communications and broadband internet. We would even hesitate to call this ‘essential first-world energy infrastructure’, considering the use of air conditioners, in a residential context, seems much more widespread in the US and Canada than, for example, in Europe (though you could counter-argue this isn’t a million miles away from a district heating investment, which is pretty key in parts of Northern Europe).
Even if we accept that investments like Enercare provide an essential service in the markets they operate in, one could legitimately question whether its 50-year market presence – a sign of resilience, no doubt – is on a par with the monopoly characteristics many investors seek from the asset class.
The firm may not be easy to disrupt, but it’s certainly not above disruption. As it admitted in its March annual report: “Enercare operates in a competitive environment and hence its growth and sustainability may be negatively impacted by loss of market share to new competition or due to changes in consumer behaviour.”
The latter is also worth dwelling on. Going back to the criticality scale, it doesn’t seem a stretch to suggest the kind of asset leasing Enercare and iCON’s Vista Credit Corporation offer are bound to correlate more closely with GDP than some of the more traditional infrastructure assets.
And, finally, there’s the non-negligible question of whether these kinds of investments would tick the real-asset box for real-asset investors. That is, whether most investors would put air conditioners and heaters in the same league as roads, transmission networks, or even rooftop solar panels.
Of course, let’s not be disingenuous here: every infrastructure investment is, to a certain extent, a trade-off between its contractual characteristics and the underlying asset. A fully merchant wind farm, for example, is definitely a piece of infrastructure; it would also definitely fall outside most infrastructure allocations, from a risk-return perspective.
Perhaps the most important question, then, is not whether these assets are infrastructure – they’re not, they’re infrastructure-like – but whether managers would still be seeking them if we lived in a world where the amount of capital targeting the asset class didn’t vastly surpass the number of investable assets available, with the inevitable impact that heightened competition has on returns.
It’s that context that’s worrying investors.
No one will fault managers for the odd opportunistic transaction. And no one is arguing for a fundamentalist approach to the asset class that bans meaningful innovation and is blind to emerging sectors. But if the exceptions start becoming the rule because it’s the only way managers can deliver on the returns they promised, investors will not take kindly to it.