It’s now nearly a full 12 months since one of the world’s largest infrastructure investors delivered a striking blow to UK regulated assets, while also issuing a warning on such assets elsewhere.
Speaking at the Infrastructure Investor Hong Kong Summit last November (yes, a physical gathering of people), GIC’s head of infrastructure Ang Eng Seng said it thought the UK was “the best and safest place [to invest]. My gosh, we were wrong”.
“Investing in regulated assets has risks and a key risk is regulatory surprises. We need to price that [when making investments] – it’s almost like an insurance premium we need to build in,” he continued. “If we can’t do that, we just stay away.”
Back then, infrastructure risks were a little easier to envisage and define. Regulation was a threat to returns – not just in the UK – and infrastructure managers had plenty of choices around what and where to invest. For some, regulated assets simply weren’t worth the hassle.
However, GIC has won a slight reprieve as one of the owners of Yorkshire Water, managing to successfully appeal to the UK’s Competition and Markets Authority last month over regulator Ofwat’s price controls. The CMA drew sharp criticism this week from Rachel Fletcher, Ofwat’s chief executive, who said the ruling “risks incentivising companies to look for easy, short-term financial returns”.
How the tables have turned. A more neutral observer might replace Fletcher’s “easy” tag with “reliable” and therein lies an explanation to the sector’s recovery. In addition to the growth of super-core strategies, covid-19 is heaping unanticipated pressure on revenues across the asset class, meaning regulated assets provide a degree of stability that other sectors cannot guarantee today.
Just in the past seven days, Macquarie Infrastructure and Real Assets has agreed to buy CEZ Group’s assets in Romania, which, in addition to generation assets, also includes an 86,665km regulated electricity distribution network. Allianz Capital Partners, a victim of “regulatory surprises” in the past in Norway, has paid €368 million for a 75 percent stake in Portugal’s Galp Gás Natural Distribuição, a regulated gas distribution network of more than 13,000km. Meanwhile, Aberdeen Standard Investments agreed a deal for Outokummun Energia, a Finnish electricity distribution network.
There’s also the ongoing battle for UK-based Western Power Distribution, a potential deal that could fetch about £12 billion ($15.6 billion; €13.2 billion). Despite the threat of Ofgem price controls, it has attracted interest from industry bigwigs including MIRA, Brookfield and Ontario Teachers’ Pension Plan.
This increased interest was underlined by managers in a recent Global Infrastructure Investors Association survey, in which regulated gas and electricity assets were a rare exception of a sector outside renewables and digital infrastructure being viewed in a positive light.
If this trend is to continue, the challenge for GPs will be convincing investors to back them. Our upcoming LP Perspectives survey reveals regulatory risks (49 percent) are LPs’ greatest concern in infrastructure today, a significant increase from the 36 percent of respondents to highlight this factor last year, while only 15 percent of LPs want to increase commitments to super-core strategies.
Perhaps their biggest concern next year will be one of alignment, then.