The labels of core and core-plus infrastructure have long been divisive in the industry, and not just in terms of categorising managers’ strategies and investors’ allocations. Several times over the years, we have heard groans about how many core or core-plus panel debates one can sit through during a 12-month period. Yet a November 2017 feature exploring these definitions continues to be one of our most read articles each year.
This year, however, might spell the end of those broad labels, thanks to the shocks – and the ongoing reality check – brought on by the coronavirus.
As we explored in our April Deep Dive on fund structures, several of the characteristics and practices of the infrastructure fund industry were born out of private equity, and some of these (highly leveraged) chickens had already come home to roost following the 2008 global financial crisis.
This time around, the risks taken in some investments designated as core-plus are raising questions as to whether these assets should be seen as infrastructure at all – or, at the very least, are prompting a rethink over what types of services are essential during a pandemic.
Hywel Rees, chief executive of AMP Capital’s Leeds Bradford Airport, told us last June that “airports are kind of like having your cake and eating it. They’re defensive on the one hand; there’s an almost permanent demand for travel. On the other hand, because they’re complex businesses and often have commercial levers you can pull, they give you an upside and a flexibility that a lot of infrastructure assets lack”.
As reported in this week’s edition of our newsletter The Pipeline, AMP Capital’s Global Infrastructure Fund I – which owns Leeds Bradford, Newcastle, Melbourne and Launceston airports, as well as Millennium Garages in the US – suffered in Q1, recording an 11.7 percent fall in its valuation.
EQT offers another example, with last year’s investment in theme parks operator Parques Reunidos bracing itself for three to four quarters of “substantial revenue impact”, head of real assets Lennart Blecher told us this week. Blecher said the asset falls under the category of “recreational infrastructure” and is “like a sporting facility”. One has to wonder whether the days of such demand risks being taken in infrastructure assets will be numbered, post-covid.
Of course, hindsight is a wonderful thing and no one was going around drafting business cases accounting for an unprecedented global freeze on travel across land and sea. Still, the experience of living through a global pandemic of this scale should be severe enough to learn some lessons from; and one of these lessons will almost certainly be what constitutes essential services and demand.
The irony, as FIRSTavenue’s head of US project management, Chris Tehranian, told us in February, is that the core and core-plus classifications that are common currency today were a consequence of redefining risk after the GFC. “The issue is that the further you go up the risk curve, the fewer of the foundational infrastructure characteristics are likely to be present in an investment,” he said, though changes that were afoot before the pandemic might become increasingly relevant.
“More benchmarking service providers are looking through fund portfolios and are focusing on the underlying assets,” he added. “This seems to be gaining momentum as more investors are requiring GPs to disclose underlying portfolio information to the service providers on a regular basis. Transparency and industry adoption will be key here.”
This kind of sophisticated look-through, then, is likely to come with a re-rating of what represents infrastructure. If long-term, stable and essential are what the asset class is all about, then it’s worth seriously debating whether core-plus infrastructure abandons too many of those “foundational characteristics” in its quest for higher returns. Conversely, it’s also worth discussing whether it’s time for recently labelled ‘super-core’ assets to be part of the mainstream again, their lower returns accepted as the price of investing in long-term, stable and essential assets.
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