1 Hardly core?
Investment strategy labels such as core, value-add and opportunistic were imported into infrastructure from real estate, where they arguably refer to far more clearly defined parts of the market. If those labels lack clarity in infrastructure investing, then terms such as core-plus do not seem any more precise.
“Investors don’t particularly say ‘core’ and ‘non-core’,” says John Mayhew, head of infrastructure debt at M&G Investments. And even if investors did routinely use such terms, it would be worth asking whether investors could agree as to what was or was not core, and whether what was once core five years ago would still qualify as such.
The perceived safety of core infrastructure has seen that label stretched in two directions as managers look to assert core credentials. At one extreme is super-core, with core-plus then diverging from pure core in the other direction along the risk/return spectrum. There is also, notes Anish Butani, private markets senior director at bfinance, such a thing now as value-added core.
With terms such as value-added core, and with the likes of core-plus bleeding into value-add – often used as a term interchangeably with it – the relevance of these labels begins to look questionable. However, perhaps their flexibility is actually a strength.
Indeed, whereas a manager might like to justify higher fees through a value-add fund strategy, dubbing it core-plus instead attracts those investors who want the comfort that the core label bestows.
“Investors want to know what type of infrastructure they are investing in and having these segments can be helpful in driving closer alignment with their investment strategy,” says Alastair Yates, managing director at Macquarie Asset Management.
As he accepts these terms can mean different things to different parties, he adds: “There is room for a lot of variation depending on how different managers think about different risks. It is therefore really important that investors look under the hood to try and understand the strategy and real risk profile of an infrastructure business.”
In other words, be guided by the label but do your own homework.
Investors largely seem to have taken that message onboard. Many are putting far more time and effort into researching new approaches to infrastructure investing than was the case 10 or even five years ago, when a one-size-fits-all mindset was more common.
This can be seen in the assets they are targeting and, indeed, in the fund strategies they are allocating to. Assets such as car parks, motorway services and ports are attracting more attention, as are healthcare – including dementia care – and niche transport sub-sectors.
Data centres and telecoms have become core. AMP Capital principal Adam Ringer notes that the key determinant in whether something should be classed as core is really whether an asset is “genuinely essential to people and the economy”.
In fact, intelligent investors can steal a march on the competition by mining core-plus or value-add for assets that are actually safer and higher yielding than those classed as core. Assets traditionally thought of as core could struggle in the future. UK utilities, under heavy regulatory pressure, provide one example of where this could be the case.
There are sub-sectors that are not seen as core yet, but which will be in the future. The transition of data centres from fringe interest to central importance shows exactly how this can happen. Ringer points to district heating and rolling stock as essential services with high barriers to entry which could, therefore, be next in line to make the same sort of move into core buckets.
A further example of investors’ broadening palates comes from infrastructure debt, where HSBC’s Shantini Nair sees demand growing strongly as institutions look for yield, resilience and diversification.
“Investors are drawn by the fundamental benefits of infrastructure debt, notably resilient cashflows in an uncertain and volatile environment, and the pricing premium to corporate bonds due to greater illiquidity and complexity,” she says. The coronavirus pandemic has clearly been a factor in this, driving banks to step back from certain markets – notably non-investment grade among them – and opening the door for non-bank lenders to step in.
3 Coping with covid
Covid-19 has brought difficulties, such as serious delays – a particular concern for greenfield managing director Andy Matthews at Infracapital – but where there are challenges, there are opportunities.
Indeed, governments appear to view infrastructure as the solution to many problems. As they look to build back better, they are showing “a real enthusiasm for infrastructure investment”, says Matthews, “because this is one area where the government can stimulate demand through policy, procurement or direct investment”.
Fabian Pötter, co-head of infrastructure at Golding Capital Partners, agrees the pandemic has, if anything, underlined the importance of infrastructure. The claim to be stable through good and bad seems to be holding up. “In reality, this is the first major crisis the infrastructure market has faced,” Pötter says. “All the signs are that infrastructure has weathered the storm well.”
Glenn Fox, head of infrastructure debt investments at HSBC, supports this. He is yet to see a single asset in HSBC’s portfolio go from investment grade to non-investment grade.
If possible, then infrastructure is having a ‘good crisis’.