It’s too early to predict accurately how covid-19 will affect or change the infrastructure investment industry because a lot depends on which stage of the crisis we’re currently at. Will this be over by September or will there be a second wave of contagion?
From a pure infrastructure point of view, I think we have to look at sub-sectors or even specific assets. The first sector to be impacted of course is air transport. I think we are all working on a scenario where we’ll have a slow recovery starting from now but which is very slow and not getting back to pre-covid traffic levels before the end of 2022.
Looking at aviation specifically, the question is: will air traffic ever be the same or are we going to have to change the model if people are less willing to travel as much for a weekend getaway or for a meeting? The outcome of that could be a change in the sector’s growth trajectory in the longer term.
The roads sector has also experienced a shock, but to a lesser extent. As lockdowns ease, we see traffic recovering quite rapidly. Something else to consider is, in light of the coronavirus, people will avoid public transport when they can.
Turning to energy, we again very much need to look at sub-sectors. The drastic drop in oil prices, combined with covid-19, has severely impacted the upstream and midstream sectors, particularly in the US, where losses have been dramatic. Storage, on the other hand, has benefitted from the contango market, with people desperate to store oil.
Energy of the future
As for renewables, it depends how much an asset is exposed to price and merchant risk. But, all in all, I think it’s a positive for the sector, which is the energy of the future and I expect its market share will continue to grow.
Moving beyond sectors and looking at where opportunities may originate,
I think it will be similar to what we saw in 2007-08: industrial companies that will face cash liquidity issues will have to sell some core infrastructure assets. That, combined with public deficits and a recession, will require governments to launch new initiatives to invest in the sector. As a result, I think infrastructure will gain more momentum.
Looking at the infrastructure investment industry, I expect GPs that have moved closer to private equity-type deals or core plus-type assets will suffer, and some of them will even disappear – similar to what we saw in the aftermath of the global financial crisis
On top of that, some institutional investors that were investing directly will realise it is not a true bond play and that they need active management, very careful selection and a good level of diversification.
So, we’ll see some direct investors going back and saying, “well, we need to invest in funds because going direct is too risky for us”.