Igneo: Resilience is the watchword

This article is sponsored by Igneo Infrastructure Partners

In operation since 1994, Igneo Infrastructure Partners is the recently rebranded direct, unlisted infra investment arm of global asset manager First Sentier Investors Group. It invests in mid-market core/core-plus opportunities and has around $15 billion of assets under management. John Ma is a partner and co-head of the North American business.

The team is “traditionalist, historically”, Ma says, targeting transportation and utilities in Europe, North America, Australia and New Zealand. With offices in Sydney and London, Igneo has been building out its North American presence for the last three and a half years. In August, portfolio company Patriot Rail announced its acquisition of Denver-based short-line operator Pioneer Lines, with Ma suggesting rail transport is a particularly attractive sector.

What is it you like about US freight transportation right now?

North America and the US have always had an incredibly well-regarded, extensive and efficient rail transport network. It is arguably the best in the world, in terms of connecting all the different geographies and markets. So that is a very strong backdrop.

For a long time, the trucking industry has had some issues, which have been exacerbated during the covid period.

In particular, there has been a chronic shortage of truck drivers. It is a difficult lifestyle and the industry has had difficulty recruiting people, which has only grown worse during the pandemic, when there has been a severe labour shortage overall.

Rail, by contrast, is very competitive in terms of its efficiency moving freight. And from an ESG perspective, in terms of carbon emissions per freight tonne, it is three to four times more efficient.

Depending on the commodity, there are some pockets of volatility. But overall, rail tends to provide an essential service to factories, manufacturers and shippers to get their goods to market. We see very strong resiliency in terms of volumes coming out of covid, and very strong continuing demand for freight rail at a time of backlogs and congestion.

What about Patriot Rail in particular?

When we acquired Patriot in 2019, part of what underpinned our interest in the company and in the sector is that new railroads really aren’t being built in North America. The short-line freight sector is quite fragmented, a by-product of deregulation. The Staggers Rail Act of 1980 led to the creation of many smaller short lines, as branch lines were divested.

There are more than 600 short-line railroads in the US and less than half of them are under the management of a professional short-rail holding company; the rest are in the hands of individual private owners. Over the long term, there is a broad opportunity to aggregate individual short lines under these professional holding companies, Patriot being one.

Structurally, that is attractive to us. We are long-term investors, willing to put capital in and grow a company through accretive opportunities like the acquisition of Pioneer Lines.

Patriot is extremely well run, with high safety standards. It is a real leader in that regard, and in the railroad industry, safety and efficiency go hand in hand. It is also focused on essential commodities: forest products, chemicals, pulp and paper, agriculture. Intermodal cargo, which can go by truck or rail and is mostly consumer products, tends to be more cyclical.

What is the state of shipping coming out of covid?

There are lots of players in different parts of the overall transport chain: shipping lines, port terminal operators, trucking and drayage, warehouse companies, railroad companies. There is such a huge diversity in the market that overall the transportation supply chain gets very fragmented.

Broadly in the industry, given recent disruptions, shippers will want greater degrees of visibility, service standards, or control to make sure they have a resilient supply chain going forward. They don’t want to experience again what they have gone through over the last couple of years. Rather than trying to find the cheapest way to get goods to market, they will look to diversify in terms of who they use and where goods flow through, focused on efficiency and reliability, so they don’t wind up with a bottleneck that brings their business to a halt.

If you take ports, for example, it has been a trend for a number of years that some shippers of cargo have moved to the East Coast from the West Coast, which has had highly publicised congestion issues. The type of players they look to are providers who are very reliable and offer good quality service, and that is going to be increasingly at a premium.

As a result, in addition to financial investors, many strategic players in the industry are re-evaluating where they want to play. It all leads to a pretty dynamic time in freight transport and infrastructure generally.

How significant is the Inflation Reduction Act?

The legislation is going to add further strong tailwinds behind renewable power in the US. It is a real boon to the industry.

In particular, it is quite meaningful within infrastructure to allow tax credits for renewables to be transferable. Previously, a wind project developer would have to partner with a very large Wall Street institution that had stable income and could utilise tax equity. These were very complicated partnership structures, and the limited number of players sophisticated enough to do this created a bottleneck in terms of project financing. The ability to sell credits without entering into complicated partnerships for tax equity is great for the renewables industry and will help to accelerate buildout in North America.

The second thing that is new is the investment credit created for standalone battery storage. We are big believers that, because renewables are intermittent-type resources, battery storage is necessary to be able to deliver the power.

There has been a decent amount of storage buildout, but because of the way the prior tax laws were written, standalone storage did not qualify for investment credits. We are an investor in Terra-Gen, an IPP that develops and operates utility-scale wind and solar plus battery storage projects, as well as standalone storage. The new credit will definitely be a positive for them.

How else is policy impacting renewable development?

Early this year, the US Department of Commerce announced it was launching an investigation into whether certain suppliers from Southeast Asia were circumventing tariffs in place on Chinese solar panels. The issue was whether these manufacturers in Vietnam or Malaysia were doing assembly for what were basically Chinese panels, which US solar projects were then importing.

The announcement created a huge cloud over panels from these markets, which were a large part of the overseas supply, because the tariffs would have been retroactive and the investigation would take until at least late this year. So, there was enormous uncertainty, which makes projects hard to develop. The solar industry was really bogged down, kind of stuck because of this.

In June, President Biden announced in an executive order a moratorium on any tariffs, including retroactive ones, for two years. So, the Commerce Department can finish its investigation, but in the meantime solar companies can go ahead and purchase panels this year. This disruption in the market is an example of how policy can sometimes have the opposite effect of the stated goal, to encourage transition to renewables.

What is the outlook for renewables?

For investors in the renewables sector in North America, it has been a bit of a rollercoaster year. The first half was clouded by this tariff investigation, and the Build Back Better agenda seemed very uncertain, if not dead. Now the Manchin bill has finally passed, just when people were losing hope.

The standalone storage tax credit, and the change in law that allows renewable tax credits to be broadly monetised, are huge wins for the sector. As existing investors in renewables, we are obviously very pleased about it. But in terms of valuations, the sector was already quite robust coming out of covid.

It is a challenging market to navigate. Even if you keep close tabs on the industry and have the expertise, the sector is very dynamic right now. With this legislation there is some certainty and some clarity.