We believe infrastructure is well positioned to withstand the downturn resulting from the covid-19 pandemic and has significant dry powder to benefit from repriced opportunities during the recovery. It is an essential asset class that moves, powers and supports societies around the world, and continued investment into infrastructure remains necessary to drive growth and a higher standard of living for society.
Before the pandemic, we had been talking to our clients about an increasingly competitive deal environment, stretched valuations and the overall importance of maintaining investment discipline, given it was towards the top of a cycle.
As a result of the market dislocation, some of these dynamics have suddenly been upended, and in the near term clients have been more focused on meeting income and liquidity needs in response to expectations that the economic impacts of covid-19 will play out over multiple quarters.
Over the long term, we believe infrastructure investment opportunities will be shaped by megatrends related to demographics, policy, technology and, increasingly, sustainability. The pandemic will strengthen these trends and we intend to lean into them.
For example, we believe that the green energy transition is likely to accelerate further, and consequently renewable power will continue to be the most active infrastructure sector in terms of dealflow. More broadly, the increased focus on sustainability across the globe means that more and more investors are focusing on real assets investments’ long-term impact on the environment.
In the current market environment, we’ve also seen something of disparity in performance among sectors, with renewable power, contracted power and utilities, and digital infrastructure, such as telecoms, generally performing well. Meanwhile, uncontracted energy and transport infrastructure, such as airports and toll roads without availability contracts, are facing challenges.
Naturally, there is uncertainty in a health crisis such as this. In the short term, and for all types of assets, there is a potential for supply chain interruptions and construction delays if workers need to take sick days due to covid-19 and if there are further emergency lockdown restrictions to combat its spread.
Over the longer term, there are important questions to answer. What kind of new regulations might come out of this crisis? What will the future of transportation look like? How will supply chains evolve? What will government spending on infrastructure look like?
We know that there is a huge need for infrastructure investment, amounting to $3.3 trillion annually through 2030. That is likely to require significant private capital in addition to government spending, particularly as governments are increasingly extended debt-wise.
Although it is too soon to assess how these trends will play out, we believe in a disciplined and defensive approach with a focus to weather the uncertainty ahead. As was the case during past crises, the downturn will open up new opportunities to put capital to work, and the next few years should prove no exception.