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It was a year no one could have predicted: of travel restrictions, video conferencing and on-sites conducted by drone. But amid a global pandemic that has hammered assets previously deemed among infrastructure’s most resilient – most notably airports – institutional investors remain defiantly optimistic about 2021.
Fundraising has continued largely unabated as investors have grown comfortable with remote due diligence. Meanwhile, allocations to infrastructure are only likely to grow, buoyed in particular by a voracious appetite for so-called covid ‘winners’ such as digital infrastructure and renewable energy.
But as second- and third-wave lockdowns continue to proliferate, optimism is inevitably tinged by concerns, ranging from recession to inflated pricing. Infrastructure Investor’s LP Perspectives 2021 Study, which canvassed the opinions of more than 100 institutions active in private markets, uncovers what is really keeping investors awake at night and what their plans are for engagement with the asset class.
LPs are bullish on infrastructure
Investors active in the infrastructure sector are more likely to be planning to increase their commitments than holding steady, despite the global pandemic. Meanwhile, a mere 5 percent were planning to cut back, the lowest level of any of the private market asset classes. This is perhaps not surprising, given the stellar performance that infrastructure funds have delivered.
Other data from the study show that infrastructure performance is more likely to have exceeded investor expectations in the past year than private equity, private real estate or private debt.
Digital and renewables are covid winners
Close to 60 percent of investors polled for the study are planning to up their investment in the digital sector, as the mass move to remote working, shopping and entertainment has exacerbated pre-existing trends. Meanwhile, an unrelenting drive to create a more sustainable future for our planet has only gained momentum in the face of an international health crisis, with more than half of investors planning to increase their exposure to renewables.
Transport, however, has not fared so well, with airports particularly badly hit. New pockets of opportunity are emerging around logistics networks, but 19 percent of respondents plan to reduce commitments to the transport sector nonetheless.
Appetite for core infrastructure continues to grow, with 33 percent planning to increase their exposure to core strategies, compared with just 15 percent when we asked the same question last year. The spike in interest is likely to reflect current economic uncertainty.
However, it is worth noting that core-plus and value-add strategies also remain in high demand. This may be because the popular digital and renewables sectors favour an investment style positioned further up the risk curve.
Regulatory risk tops investor list of concerns
Regulatory risk is cited as the number one threat to infrastructure performance. This is arguably at odds with investors’ move to increase deployment in core strategies, which typically invest in more regulated assets.
Regulatory risk was followed by frothy multiples and political risk in terms of what most keeps institutional investors up at night. Prices have clearly escalated, particularly in the hyped digital and renewables spaces. However, there is a sense that political risk will be muted by governments’ overwhelming desire to engage the private sector in ‘building’ an economic recovery.
Almost half of investors will not back first-time infrastructure managers and almost a quarter are planning to reduce their commitments to new teams. Obviously, covid-19 has had a marked impact here.
Although 90 percent of institutional investors polled for this study are prepared to conduct initial meetings virtually, almost half would not be receptive to backing managers they had never met face-to-face. At the same time, as the infrastructure industry matures and the number of managers with significant track records grows, there is less of an imperative for investors wanting to access the sector to take a risk with a first-time fund.
Seeking a step-up on climate change
Climate change has become an increasingly hot-button issue and investors are poised to keep up the pressure on their managers in 2021.
Almost all investors across the private markets asset classes now incorporate ESG considerations into their due diligence, with almost 40 percent claiming ESG is a major component of their analysis. This figure is likely to be even higher in the context of infrastructure, specifically. Nevertheless, concerns about ‘greenwashing’ remain, with almost a quarter of investors believing their GPs do not take climate change seriously.
More action needed on diversity
In contrast to climate change and ESG generally, far fewer investors appear to be taking issue with the lack of diversity and inclusion. Only 14 percent of private markets investors say that diversity and inclusion form a major part of their due diligence, while 20 percent do not consider diversity at all.
Nonetheless, the most forward-thinking investors are taking a stand, with 13 percent of those polled having refused a commitment based on diversity issues. It seems likely that, following in ESG’s footsteps, diversity and inclusion will ultimately become fundraising dealbreakers, but there’s still some way to go to get there.