- Infrastructure is critical to a well-functioning economy and society, but not all infrastructure assets are created equal. True diversification is key to building a defensive, resilient portfolio in line with the well-established infrastructure narrative.
- Despite the unprecedented drop in economic activity and carbon emissions, global warming is not going away. The drive to accelerate the pathway to a lower carbon future has gained renewed urgency.
- Uncertainty is here to stay. The way we live, work, travel and consume has changed and is likely to have long-lasting impacts on what and how infrastructure is delivered.
- We are confident that our long-term investment thesis and strategy, which prioritise the themes of technology, disruption and sustainability, are well placed for the rapid shift in the economic order.
In a turbulent 2020 infrastructure was an apparent safe haven, proving relatively resilient. However, the unprecedented shock
to the asset class across all industry sectors and geographies at the same time, in a short period of time, has provided food for
thought on several issues:
Firstly, infrastructure is critical to a well-functioning economy and society,
but not all infrastructure assets are created equal. For example, demandbased
transportation assets such as airports and toll-roads were hit the
worst. Renewable energy fared well, despite a 5% annual drop in energy
demand,1 whereas renewables outside the electricity sector such as
biofuels, as well as conventional energy, suffered more from the impacts
of the Covid-19 crisis. Contracted and regulated assets benefited from
more stability, while digital emerged as a clear winner. The answer lies
in the level of sensitivity to economic cycles, not in the label. This year
reminded us that true diversification is key to building a defensive, resilient
portfolio in line with the well-established infrastructure narrative.
Secondly, infrastructure continues to attract significant investor interest.
If anything, the prospect of lower interest rates for even longer served to
make assets that can deliver resilient cashflows even more attractive.
Fund raising for the first nine months of 2020 reached $78.5 billion,
the second highest rate for that period since 2015.2 Furthermore,
sustainability as a whole is in vogue, with public market fund inflows
totalling more than €50 billion in 2020’s third quarter, or 40% of all
European fund flows.3
Third, despite the unprecedented drop in economic activity and carbon
emissions, global warming is not going away. The drive to accelerate the
pathway to a lower carbon future gained renewed urgency. At the same
time the pandemic highlighted social inequalities and fragilities in our
societies. The concept of business needing a social license to operate
gathered momentum, fortifying investor appetite for social investing.
European governments enshrined infrastructure investment as a means to
stimulate the post-Covid economy via significant green fiscal packages.
The pandemic has highlighted social inequalities and fragilities in our societies. The concept of business needing a social license to operate gathered momentum, fortifying investor appetite for social investing
Fourth, uncertainty is here to stay. The way we live, work, travel and
consume has changed and is likely to have long-lasting impacts on
what and how infrastructure is delivered. 2020 showed that even within
infrastructure transitions can happen at warp speed. Digital infrastructure
is a perfect example: following the mass migration to work and study from
home, demand for data proliferated. This rapidly accelerated a structural trend which has long been coming, with communication infrastructure
becoming an integral part of a well-functioning economy. A survey by
McKinsey4 estimates this acceleration in the order of three to four years
is boosting the growth of data centres, for example.
Where do we believe we can find value in 2021 in core infrastructure? The answer is in the huge amount of investment needed to achieve Europe’s goal of a sustainable energy transition
All of which makes us confident that our long-term investment thesis
and strategy, which prioritise the themes of technology, disruption and
sustainability, are well placed for the rapid shift in the economic order.
So, where do we believe we can find value in 2021 in core infrastructure
which is the strategy´s focus? The answer is in the huge amount of
investment needed to achieve Europe’s goal of a sustainable energy
transition. The EU’s Green Deal proposes to invest in excess of
€750 billion5 in support of this, with initiatives focused on hydrogen, heat
and buildings, electric vehicle charging, energy storage and batteries.
Much of the opportunity in these sectors is naturally in the mid-market.
Many are new sectors, but importantly we believe a significant source of
generating alpha is to invest in transition assets – that is to say “brown”
assets which provide essential social and economic services, but which
have clear and ambitious aspirations to transition to green. We are excited about the years ahead. The powerful drive for a green
recovery can only strengthen our investment thesis and result in more
opportunity.
