This article is addressed to professional or semi-professional investors.
Grounded aircraft, the slump in public transport and weaker demand for energy due to the lockdown in industrial production – all of these are bad news for infrastructure investments. Or at least for some. Conversely, demand for alternative investments is likely to be further underpinned by the substantial rise in internet traffic, the increased emphasis on providing a well-functioning administrative infrastructure and expectations that interest rates will remain low for an even longer time to come. Exactly how the coronavirus crisis will affect each type of infrastructure investment remains to be seen. Either way, Covid-19 is likely to have a lasting impact on the sector.
Alternative investments, including those in infrastructure, enjoyed a boom period before the corona pandemic. According to the data provider Preqin, after exceeding 500 billion dollars in 2018, assets under management in infrastructure reached a record high of 582 billion US dollars as of June 2019.1
There are several arguments in favour of infrastructure investments: the attractive returns in periods of low interest rates, the frequently low correlations with other asset classes, the mostly low volatility, as well as the largely steady and predictable cash flows, the additional portfolio diversification and the implicit protection against inflation in several structures. There is a wide range of access options with varying risk-return profiles: direct investment on the one hand, fund investments on the other, either as equity (shares, participations, public-private partnerships/ PPP) or as debt (bonds, loans).
In addition, demand for infrastructure is largely stable and unaffected by economic fluctuations. External schocks such as the corona pandemic are definitely the absolute exception. What is more, infrastructure projects often run over a very long time period, with electricity or gas networks, for example, lasting for several decades. This suits the long-term payment obligations of insurers and pension funds.
The growth in infrastructure investments is reflected in figures by Universal-Investment. These highlight that both the overall market for alternative investments and the market for infrastructure investments have seen strong growth in recent years. Invested capital in structures specialising in alternative investments has tripled to more than 50 billion euros in the past five years (as per 31.12.2019).
While the increase in private equity was particularly steep, the net asset value of infrastructure investments also jumped to 6.1 billion euros in 2019 (as per 31.12.19) from 2.5 billion euros in 2015 (see chart). Infrastructure investments accounted for 20% of total private equity structures in the Universal-Investment portfolio.
In comparison, infrastructure investments in private debt structures accounted for 15 % as per December 31, 2019. Infrastructure investments rose to 1.4 billion euros in 2019 (as per 31.12.2019) from 263 million euros in 2015.
Prior to the corona pandemic, the data provider Preqin forecast that investments in infrastructure would continue to surge in 2020 as well as in subsequent years. Preqin expected assets under management to reach the 700-billion-US dollar mark in 2020 and to rise to 1 trillion US dollars by the end of 2022. It is impossible to say at present whether this can still be achieved. What is likely, however, is that investment flows will change.
How will the corona crisis affect the market for infrastructure investments? Some hypotheses:
Despite all the challenges posed by the crisis, traffic should pick up again in the long term on the back of demographic growth and the increasing prosperity of several emerging markets alone. What is more, there is only likely to be a short-term fall in industrial demand for electricity and it will probably be offset by rising private demand due to the trend towards working from home and to the near-total move towards digital communication. Once we have tackled the worst of the crisis, efforts to become carbon neutral are likely to return to the fore and the switch to renewable energy to be accelerated.
For this reason, despite all the changes, infrastructure investments are expected to remain in demand. It is important to point out, however, that these are complex investments from a regulatory, taxation and administrative point of view. It is also vital to note that there is no single “standardised” way to access the market. The respective investment, tax and regulatory legislation, the level of the investor’s experience in infrastructure investments and the planned investment total all play a role. The Investor’s risk profile should also be taken into account. If applicable, it should also be clarified whether the investments are subject to Solvency II rules or national Regulations such as the German Regulation on the Investment of Restricted Assets of Insurance Undertakings (“Anlageverordnung”) or whether solely internal regulations need to be observed.
The crisis has once again shown how important it is to invest in highly flexible structures in order to be able to react quickly. It therefore makes sense for potentially-interested institutional investors to work with an experienced structuring partner. This grants them access to the necessary expertise as well as to individual, tailor-made solutions.
Footnote 1: Preqin – Infrastructure Boom set to Continue in 2020, 04.02.2020
Author: Dr. Sofia Harrschar
Date of issue: 9/2/2020
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