This article is sponsored by Ardian Infrastructure
As 2023 looms large, the world waits with bated breath to see whether rising inflation and volatile energy markets prove to be a minor blip caused by the war in Ukraine or the precursor to a lengthier, more sustained global recession.
For infrastructure investors like Ardian, the current financial uncertainty is showcasing the benefits of a portfolio weighted towards critical infrastructure and assets essential to the smooth running of the economy. Mark Voccola and Stefano Mion, the co-heads of Ardian’s North American infrastructure fund, discuss how a balanced portfolio is helping offset some of the current investment risks.
With covid starting to recede, how is the North American infrastructure market evolving?
Mark Voccola: Even during covid I think there were still lots of opportunities. On the fundraising side, there were plenty of investors who were looking to move into the infrastructure space, and we saw a lot of capital raised. On the deal side, there was a flight to quality across the energy side with renewables and energy transition assets: everything from clean renewable natural gas-fired assets to energy storage opportunities.
There was also plenty of activity in the telecommunication space. You certainly saw more demand for digital products and because of that there was a lot more build-out of fibre and digital towers. That trend is continuing with even more growth and as a result of recent legislation; certainly on the energy side, with the Inflation Reduction Act, we expect to see continued growth and further investment opportunities.
How is the macroeconomic picture – particularly with Ukraine and inflation – impacting your investment thesis?
MV: Our investment thesis has not changed at all. We are investing in essential infrastructure assets in energy, transportation and the telecommunications space.
In the current macro environment, we are seeing energy prices rise and an upsurge in inflation, which means our assets are retaining and, if anything, gaining value. We are more committed than ever to our core and essential infrastructure assets.
Stefano Mion: One thing to emphasise is that inflation protection is a core part of infrastructure investment. Lots of people have forgotten that. It has become even more relevant and prevalent in the current climate and that is where you are starting to see the strength of investment in strategic infrastructure assets.
Another thing is that we have always stayed away from excessive leverage over assets. So, a world of increasing rates does not scare us. It does not impact us at all and is a function of how we build during the good times.
How do current market dynamics impact or shape your acquisition strategy?
SM: We are not seeing many changes in what we are trying to achieve. The beauty is that in terms of private investments and infrastructure investment, everything takes time. We have long lead times and plenty of time to adjust to changing market environments; we do not have to make snap decisions.
From the first conversation with a seller of a management team to the signing of an investment is probably three or four months. And between the types of assets we look for and the investment process we follow, we don’t need to make major adjustments in what we are trying to do and the way we do things. Our assets come with inflation protection and we continue to focus on the same sectors, the same quality assets and the same downside protection.
How will the Inflation Reduction Act influence private sector investment?
MV: We are still digesting it, and it is a lengthy piece of legislation, but there are a few things that immediately jump out of the gate. Tax credits for standalone storage, as opposed to tying a project with another renewable asset. That will make things easier and help speed up the development and construction of new assets. It will also make the renewable energy complex more efficient and add value in that way.
Having certainty over the tax incentive regime for a period going out over a decade will be very helpful on the development and construction side. That level of regulatory certainty always gives clarity and makes things easier regardless of industry. It will smooth the path for private capital to make longer term decisions in the low-carbon space.
Some items in there should also help with supply chains like potentially bringing back more manufacturing onshore to the US. Again, that should help investor confidence with availability of equipment, equipment cost and being able to meet deadlines put forward in bids and construction plans. It is a long list of items, but it will certainly be easier to put private capital into those low-carbon deals in the coming years.
How will encouraging more domestic low-carbon energy manufacturing impact supply-chain prices? And how do you see IRA tax credits influencing certain decarbonisation subsectors such as electric vehicles?
MV: Initially it might add some supply-chain cost because you are bringing it back from cheaper sources like in Asia, but in the long run having more manufacturing in the US will create its own domestic competition that will drive efficiencies. I think you will see economies of scale in a new market take place and that will help to keep down costs.
Meanwhile, the more subsidies you see, it is likely that you will have more of those decarbonisation products. There has been a push and pull on the EV side. The growth rate of production has been almost a straight up line and that is not going to slow down.
This year we have seen high commodity prices. How do you think that risk affects the growth of low-carbon investing?
MV: While costs have gone up, off-takers for renewable projects have been amenable to either adjusting power purchase agreements or the new ones they sign having higher costs. I think that goes to demand on the end user side; people want green power, and they are willing to pay the market whatever the current cost of procuring it. What we have heard anecdotally is that the market has also moved with the increased costs of construction and production.
Are you worried about any other particular risks or challenges and how are you acting to mitigate them?
MV: Worried is a strong word. Focusing purely on the low-carbon energy side, there is such strong demand for the product, and if you are working with experienced developers using proven equipment, you end up selling at market price and that just moves with those costs.
We are excited that the market continues to grow and believe that there will be plenty of opportunities, probably beyond the scope of my work career, to make strong investments in renewable assets that help decarbonise the economy.
Where do you see the best investment opportunities in the current environment?
SM: We continue to focus on our primary three sectors: energy transition, transportation and communications. We see interesting opportunities on all fronts.
Our goal has always been to create a balanced portfolio and that is reflected in our deal pipeline. We want to invest in renewables across all technologies: from solar and wind to storage. We think there will be opportunities on the transmission front and conventional power coupled with energy transition measures will be attractive because there will be need for those resources.
On the telecommunication side, we continue to see opportunities in towers and data centres. In November we partnered with Unison, a buyer and manager of telecom site properties in the US, to build a global platform of wireless infrastructure assets across the US and Europe. We are committed to pursuing innovative investments in the infrastructure sector, and wireless is a crucial and rapidly expanding segment within the telecommunications market.
On the transportation front, we continue to see deals that are attractive to us and fit our strategy. Our goal is to create a balanced portfolio for our fund and our dealflow reflects that.
How do you weigh opportunities in nascent technologies like hydrogen?
MV: Hydrogen looks like it has an exciting future. I am not sure that green hydrogen quite falls into the infrastructure stable yield bucket just yet, but there is a lot of interest and capital being deployed. Technologies also advance to more large-scale projects really quickly, so it is something that we are keeping an eye on.
SM: In October, we launched Hy24, which will become one of the world’s largest investment platform focused on clean hydrogen infrastructure. The platform is targeting €1.5 billion for its first fund and is a joint venture partnership with FiveT Hydrogen, a clean hydrogen-enabling investment platform.
This combination will help accelerate the build-out of hydrogen infrastructure and meet the enormous demand from governments, corporations and investors. Recent analysis suggests that up to $100 trillion in hydrogen investments will be needed to meet net-zero goals by 2050.
We set up Hy24’s first fund as an impact fund and it will help scale proven technologies, providing investors with unrivalled access to a new asset class that has the potential to follow the same pace of growth as renewables. The portfolio will be diversified across geographies and value chains: from upstream projects like green hydrogen to downstream projects like captive fleet and refuelling stations. We were early backers of the renewables market, our platform reaching 7.5GW of heat and renewable capacity today, and it is clear to us that hydrogen is facing a similar trajectory.