Co-CEO and global head of clients, SUSI Partners
Marco van Daele
Co-CEO and chief investment officer, SUSI Partners
Head of real assets investments, Hamilton Lane
Senior investment director, Amber Infrastructure
Which developments did not get enough attention in 2022?
MD: Due to upheavals in the global economy and, as a result, the financial markets, investors had to abandon the fundamentals of optimising their portfolios according to risk premia and risk-return profiles. Underperformance of certain asset classes led to breaches of their respective asset allocations, leading to forced portfolio rebalancing.
MvD: As an investment manager focused on the energy transition, the segment that deserves even more attention than usual currently is energy efficiency, given the combination of a rise in energy prices and increasing concerns about energy security. Having invested in the sector since 2015, SUSI Partners noted a significant increase in the demand for energy-saving measures from every corner of the economy, and more institutional capital will be needed to meet it.
Where do you see key opportunities for infrastructure asset managers?
MT: We see significant interest in battery storage, e-mobility and digital experience. I expect the trend for energy resilience and transition to continue, not only in the renewable space but across all infrastructure assets.
BB: We continue to see investor interest primarily forming behind assets connected to digitisation, electrification/energy transition and global trade and logistics. These sectors are poised for the largest share of transformation capital over the next five to 10 years. While most of the growth capital will continue to flow to these sectors, there are also some deep value opportunities emerging in traditional midstream energy infrastructure and traditional power generation.
Against the macroeconomic backdrop, how resilient do you expect infrastructure to be in 2023 and beyond?
MT: We expect the asset class to remain robust in terms of underlying performance, coupled with an increase in equity investment opportunities amid a higher cost of borrowing. Nevertheless, as with historic shifts in global economic models, we are likely to observe differentiation between infrastructure assets – those that are well managed and capitalised – versus assets that became infrastructure due to scope creep or excessive leverage.
BB: Infrastructure assets characterised by conservative balance sheets, fixed-rate debt and durable cashflows should continue to support downside protection in a softening economic environment. Although we may still see some softening in market valuations as we have in other asset classes, we believe infrastructure assets are uniquely positioned to weather economic headwinds given their asset and contract characteristics.
MvD: It will vary depending on the subsector and on the nature of the revenues. Looking back at 2022, the energy transition subsector could be regarded as a special case. It was not only extremely shock resistant but also generated upside, since inflation was largely driven by rising energy prices. This, in turn, drove revenues across the asset class.
How has appetite for the energy transition evolved in 2022?
MT: Policymakers have passed a series of laws at a record pace to improve diversification of energy supply, acceleration of permitting procedures and additional subsidies for new technologies. We have observed strong and increasing interest to invest in more complex IPP structures and find opportunities to deploy funds in emerging battery storage and hydrogen projects.
BB: Investor appetite for energy transition has continued to grow, and investors now have increased options on how they can implement their energy transition investment themes. Whereas many infrastructure investors have focused their investments around generation (ie, wind and solar), opportunities are evolving across EV charging, transmission, battery storage, hydrogen and carbon capture and sequestration.
MD: Energy transition is no longer just the buzzword of the moment… It has fully established itself as the big investment opportunity of our time. Asset owners are now digging deeper when selecting managers who provide access to the sector, dissecting the relevant track record in subsectors, risk profiles and respective pricings. This will provide the opportunity for specialised managers to further distinguish themselves.
How will new government regulations like the IRA and IIJA influence the asset class?
BB: Government programmes such as these established clarity on where and how the federal government intends to engage on some critical infrastructure sectors, including renewable energy, digital infrastructure and transportation. The extension of renewable tax credits, the expansion of the types of assets that can qualify for those credits, and expanding the parties that can participate should continue to support strong investment in the energy transition sectors of the economy. At the same time, consumer-directed subsidies for electric vehicles and the expansion of rural broadband programmes will also be favourable for infrastructure investors.
What will the latest raft of European sustainability regulations mean for the sector?
MT: In 2022, Article 8 or higher funds accounted for the majority of EU funds. However, amid the scramble to attract ESG capital, a number of funds had to downgrade from Article 9, highlighting the challenge of delivering on sustainability commitments. SFDR and EU Taxonomy will distinguish managers with experience in ESG investing and are likely to increase flows of capital to the right managers, positively affecting EU sustainability objectives.
MvD: While the incoming regulations are welcome and, in our opinion, will lead to the desired long-term effects of accountability and credibility, in the short-term they will lead to reporting challenges on all levels – for portfolio companies, asset managers and asset owners. Everyone will have to introduce new processes, define key performance indicators, and find ways to collect data to credibly measure that performance.