The coronavirus pandemic has, sadly, derailed our annual infrastructure jamboree, the Global Summit, which is now set to take place in Berlin on 12-15 October.
In the meantime, as you probably have noticed, we have brought the conference to you through our Global Summit On-Demand portal. Here you can find an exclusive mix of webcasts, insight and data on the hot topics we’ll discuss later this year.
With a few webcasts already under our belt, we bring you 10 key takeaways on how the coronavirus is affecting the infrastructure investment market.
Infrastructure is an asset class that is well-known for the essential services it provides. However, this also means that those services need to continue being provided, especially during the current crisis, participants noted during a webcast on the impact of covid-19.
“We need to be acutely conscious and aware that [our portfolio companies] are providing essential services to the community, in good times and in difficult times,” said Macquarie Infrastructure and Real Assets’ head of EMEA, Leigh Harrison. “So, it’s very important those assets – the utility companies, the telecommunications companies, transport companies, energy companies – are all providing the services that are expected.”
“Not everyone can work from home,” highlighted BlackRock’s deputy head of real assets, Anne Valentine Andrews. “We’ve got construction sites happening all around the world [so we have to make] sure that we’re giving the right protections to employees and, also, that they can continue working.”
Too much debt proved to be costly for the world economy during the 2008 global financial crisis. So it was reassuring to hear Schroders’ head of infrastructure, Charles Dupont, state categorically that “there is not too much debt in the system” as the world prepares for a significant coronavirus-induced recession.
“The main difference we see with the financial crisis of 2008 is that lenders – which at the time were mostly banks, not institutional investors – were not as disciplined,” Dupont explained on a webcast on the impact of covid-19.
“When you look at debt multiples, when you look at the loan to value – which is another criterion for assessing how much debt you have in a company – you see that, even in our junior debt fund, the loan to value remains below 50 percent. Of course, enterprise values [are] much bigger because valuations have been getting higher and higher.
“But [that is] more the cause of abundant capital injected through equity rather than debt,” he concluded.
“Infrastructure is all about moving people around the world and, right now, we need to do exactly the opposite,” AMP Capital’s head of infrastructure equity, Boe Pahari, told us on the same covid-19 webcast, referring to the airports the firm runs. However, he was quick to add that those assets “will remain as relevant as they are today”, dismissing the idea that airports will become “relics” or that we will “suddenly find a different way to live and nobody travels”.
BlackRock’s Andrews also cautioned against expectations of large-scale paradigm changes: “I’ll take the other side of anyone who will argue that everything is going to change and we’re all going to suddenly sit at home and do everything virtually.”
But Schroders’ Charles Dupont struck a dissonant note, warning that the longer the covid-19 crisis goes on, the more permanent certain behavioural changes might be.
Don’t throw away your paradigms just yet, then.
“We’re positioning ourselves right now and we have a lot of dry powder,” Jerry Divoky, vice-president, infrastructure and renewable resources at Canada’s BCI told us during a webcast on direct and co-investment programmes. “We’re looking to deploy $1.5 billion annually and that hasn’t changed. So, we’re looking forward to finding a better valuation environment in the next six to 12 months.”
Divoky was echoing a sentiment we have heard from several industry participants.
What is more, those deal opportunities aren’t confined to the primary markets. “We’re very active in the secondaries sector and we are already getting calls from intermediaries talking about LPs wanting to get out of certain funds,” added Dominik von Scheven, senior investment manager, private equity investments, at HSBC Global Asset Management.
Still, it’s worth exercising some caution, industry veteran Mark Weisdorf, the founder of Mark Weisdorf Associates, argued.
“I think patience is critical,” said Weisdorf. “What are the new-normal assumptions for base-case scenarios? Because not everything will revert to where it was pre-crisis. People will need to think about different growth rates and discount rates for certain variables and assumptions for their models.”
“It’s the poor relation – the ‘G’ in ESG – that is taking the front-seat now,” argued NTR chief executive Rosheen McGuckian on our recent ESG-focused webcast. Because “in times of upheaval, you’re really testing your governance”.
Graham Matthews, chief executive of Whitehelm Capital, agreed, pointing out that the social element is under the spotlight too. He highlighted the health and safety of the firm’s and its portfolio companies’ staff as one of its key concerns.
“All of our assets provide essential services,” said Vantage Infrastructure senior partner Oliver Schubert. “So if this is not the time when sustainability and resilience of infrastructure is tested I don’t know [when that time is]. Yes, there is concern about the financial impact of all this. But, frankly, it’s all very secondary to fundamentally making sure that our people are safe and our customers – especially the most vulnerable – continue to receive the services from our businesses.”
The point that today is the right time for environmental, social and governance concerns to take the front seat was also underscored by Marco van Daele on a webcast focused on the energy transition. The co-chief executive and chief investment officer of Zurich-based manager SUSI Partners said the environment has become a leading consideration for how asset managers think about investments during the ongoing transition to cleaner generation sources.
“The energy transition is what we do and how we invest,” he said. “ESG is how we do it. ESG is the lens through which we view investments.”
David Swindin, a managing director at Cubico Sustainable Investments, agreed, adding that investing in the energy transition is “firmly in the middle of ESG”. As energy markets have collapsed amid pandemic-related low demand, Swindin said that figuring out the energy transition was a “big challenge of how we go forward and how we deal with the next 50 years of living”.
Beyond pandemic-related shutdowns, volatility in global energy markets has been the main driver in economic uncertainty, especially for economies still heavily dependent on oil.
“An oil price war means […] volatility in consumer prices and stress on the sector,” said Lucy Heintz, a partner at London-based manager Actis, on the same energy transition webcast.
She explained that during previous periods of volatility, cheap energy prices meant oil was less threatened by renewables. But today, the cost for renewable generation has fallen so much, solar and wind projects will remain a competitive power source.
“What’s different this time is that renewable energy is cheap, the lowest cost [of energy] in two-thirds of the world,” she said.
“[Renewables] are such a well-established trend, and the energy transition is so well-established, we do not actually see the same kind of destabilisation threat that we might have seen in oil price cycles previously.”
David Giordano, BlackRock’s global head of renewable power, said the biggest risk today to an investor committed to a specialised investment strategy was a lack of diversification.
A lack of sector or geographic diversity could mean “big chunks” of capital at risk when volatility hits. “It can become a bit of an echo chamber,” Giordano explained on our energy transition webcast.
However, Mikael Karlsson, head of energy at Actis, said that, even during the pandemic, some sectors have “proven themselves to be much more robust, much more defensive”.
He explained: “If you own a power asset today with a long-term power purchase agreement, you continue to deliver an essential service that continues to be paid.
“With an airport today, you’re not going to see a lot of people coming through, and you’re not going to see a lot of revenues coming through. So, I think it depends on what sector you’re in.”
If there was any doubt before as to whether digital infrastructure provided an essential service, that doubt has been dispelled in the age of covid-19.
“Today, I think it’s become abundantly apparent that digital infrastructure is not only in vogue, but mission-critical to allow the world to continue under some form of normalcy,” Digital Colony managing director Steven Sonnenstein said on a webcast looking at the sector. “The reliance on networks […] has become extremely critical to allowing the world to operate.”
But as the sector’s essential nature becomes obvious, and demand grows along with it, will regulation also become stricter?
“It will be interesting to see what the regulatory and government and political response will be over time,” said Ed Pallesen, managing director at HIG Capital. “As the world comes to the realisation that really and truly this is an essential service […] – in many cases, one’s livelihood depends upon having a functional broadband connection – [will] that manifest itself in […] enhanced regulation on price, [or] an extra impetus to connecting rural or underserved homes?”
When the impacts of the coronavirus pandemic finally subside, globalisation will not be over, but it may be redefined, argued Giordano, on our energy transition webcast. “I think that investors, manufacturers and retail providers are going to be looking for broader diversification, and I think that benefits the developing world,” he said.
Developing infrastructure in emerging markets will present an attractive opportunity as countries meet new supply chain demands, Giordano explained. “The timing right now to provide essential infrastructure in those markets is quite attractive.”
Karlsson singled out the buildout of renewables in these markets as a growth opportunity. “I think emerging markets will outperform because of the growth and opportunity in the renewables market,” he said.
However, diving into emerging markets investments still requires regional and sector expertise if firms are to build successful projects.
“If you do all of the things you need to do right, I think you will outperform,” Karlsson added.