Thanks to the pandemic, much of what we once considered essential we are finding we can live without, while other parts of our day-to-day lives have become a priority. But with wants and needs shifting so dramatically, have infrastructure investors been caught on the hop?
Data centre and telecoms assets were being seen more as core even before covid, and this trend has accelerated under the ‘new normal’. Investors are also paying more attention to healthcare and to areas of transport, such as ferry services. Previously popular assets, such as toll roads, are suddenly a lot less attractive.
Although it might seem as though covid led to a fundamental change in what was regarded as core, how investors considered what to put in their portfolios was already starting to shift.
The £46 billion ($60 billion; €51 billion) Border to Coast Pensions Partnership – a collaboration of UK local authority pensions – announced in July that it would commit £675 million across eight vehicles offering core, core-plus and value-add opportunities. The sub-sectors spanned the energy transition, transport, telecoms, data technology, greenfield and emerging markets. An additional £760 million, with a similar mix across a broadly similar scope, has yet to be allocated.
Like many mandates that have gone before, there appears to be little distinction between what might be core or otherwise. Some consider the labels to have been little more than marketing, with the edges usually blurred, and that new types of assets are being considered.
“Investors don’t particularly say ‘core’ and ‘non-core’,” says John Mayhew, head of infrastructure debt at M&G Investments. “They normally just come to us for infrastructure, and it’s more for us to say what we think something is and isn’t.”
Heiko Schupp, global head of infrastructure investments at Columbia Threadneedle Investments, has always maintained there are no firm definitions, and that to try to apply one would be unhelpful. “It depends on the sub-sector, the country and where the investor is based,” he says. “It is not as clear cut as other asset classes, such as real estate.”
One man’s meat…
This lack of distinction has become more pronounced in 2020. “When markets are rocked by unforeseen events, performance changes on what was previously seen as ‘core’,” says Schupp.
Data centres, the categorisation of which has been the centre of much debate, became a key part of global infrastructure as countries went into lockdown. These assets are being seen in a new light. “Before covid-19, many investors would have said core infrastructure needed to form part of an essential service, but also have a long-term contractual nature,” says Schupp.
Adam Ringer, principal at AMP Capital, says: “Some supposedly ‘core’ assets that offered single-digit returns hide risks that investors cannot control.”
Government controls on price hikes for tolls or regulation of the costs around utilities – along with the potential for fines – are just two examples of how investors could get stung. Mayhew also alerts investors to concerns about considering certain assets as core: “Long term, and depending on the country, you need to keep an eye on gas, because with environmental targets, gas will be reducing in many countries.”
Instead, core investments need to concentrate on what is “genuinely essential to people and the economy”, says Ringer. AMP made its first towers acquisition in 2013 and has continued to look for what it classes as core, tackling tricky areas such as healthcare.
Among its latest projects are funding health facilities that provide specialist care for adults. “It solves a problem for their communities, helps councils and produces a return for LPs,” says Ringer.
The sector is attracting other investors considering assets that were previously outside their scope. Australian superannuation scheme Hesta announced in July that it had invested A$19 million ($13.6 million; €11.6 million) in Korongee Village, a facility in Tasmania’s state capital Hobart that provides housing and care for people with dementia.
Debby Blakey, Hesta’s chief executive, is a supporter of pensions investing in ventures to help create a better world for their members. She hopes the move will encourage Hesta’s peers to allocate their funds to “similar projects to help address the growing issue of dementia in Australia”.
Rob Horsnall, head of direct private equity at USS Investment Management, has seen non-core infrastructure grow over the past five years, particularly as fund managers have pivoted towards it. USS also sees the global potential of non-core, but Horsnall cites the difficulty with the definition.
“The type of assets that fit this broad category depend very much on the jurisdiction you are talking about,” he says, taking a similar view to that of Schupp at CTI. “They may be different depending on which country you are considering.”
He also sees how non-core or core-plus assets can be converted into core holdings over time: “A good example of this is investing in the telecoms sector, where tower businesses are now being priced as core infrastructure, given the predictability of the cashflow, [the fact that they are a] critical service and barriers to entry.”
USS has been a long-time investor in real assets, holding stakes in airport operator London Heathrow, utility Thames Water and NATS, the UK’s air traffic control business. It was also a pioneer of holding private assets in liquid defined contribution schemes, something for which it retains a significant appetite.
“These opportunities are, to start with, riskier than core infrastructure and so require more internal resources, but can deliver returns for investors,” says Horsnall. Within USS’s wholly owned asset manager USS Investment Management, the UK’s largest pension has built a team of more than 50 people to focus purely on private market assets.
According to Horsnall, this means the fund “has the depth and breadth of resources to assess the risks and opportunities that come with being long-term owners of these assets”. This team sources and carries out its own detailed due diligence and investment decision-making process across private markets, including core and non-core infrastructure. A six-strong asset management team, which is set to expand in future, helps manage these types of assets.
AMP’s Ringer says this assessment is key to selecting and deciding whether something is core. With variables outside an investor’s control, he considers there to be too many uncontrollable risks, which are often mispriced by the market, for an asset to be classed as core.
This trend has been highlighted during the pandemic, as many elements that many investors took for granted – such as passenger numbers, industrial demand and the potential for deflation – have been tested.
A non-core future?
Yet it may not all be bad. “We could look back at this period and – the clear human tragedy notwithstanding – there are elements where the infrastructure asset class is really going to have shone through,” says Mayhew. “For those assets where nothing has changed, they are performing absolutely fine.”
Schupp thinks it might also be a turning point for the terminology of non-core infrastructure. CTI owns and operates a ferry company that transports goods – and usually people – to and from the Channel Islands.
“For many, this asset would not be classed as core,” he says. “But through the pandemic it has kept 165,000 people alive. We now have the opportunity to enhance our understanding about what is essential and what isn’t – and change investor perspectives.”