Despite the volatile market backdrop, infrastructure investors are playing a longer game and remain focused on investments with attractive industry fundamentals and strong underlying thematic drivers.
Infrastructure Investing: taking the long view
Infrastructure investors are playing a longer game and remain focused on investments with strong thematic drivers.
4 minute read
Key takeaways
- Volatility in equity, credit and interest rate markets in 2022 has made the investment environment challenging for investors. However, infrastructure firmly remains an attractive asset class that continues to deliver a consistently strong pipeline of opportunities.
- Renewables, digital infrastructure and regulated utilities that are leveraged to the energy transition or decarbonization of the economy continue to be highly sought after despite a more challenging macro and operating environment.
- The existing market backdrop creates an environment where transactions are generally taking longer, and there is evidence that a valuation gap is emerging between some vendors and buyers.
- To navigate more complex markets, investors are focused on fundamentals and willing to take a long-term, through-cycle view, providing the platform for a robust M&A pipeline.
Infrastructure investors active in Australia have shown their resiliency and long-term focus in a broader market characterized by volatility and geopolitical uncertainty. Australia and the broadly defined infrastructure sector have provided a safe haven, driving a deep pipeline of transactions but also demonstrating that funding support remains available for the right opportunities in this crucial part of the market.
“Despite more complex market conditions there remains good activity and a robust pipeline through 2023, particularly in renewables and digital infrastructure,” says Sam Watson, Head of Infrastructure & Utilities for BofA Securities in Australia.
“Despite more complex market conditions there remains good activity and a robust pipeline through 2023, particularly in renewables and digital infrastructure.”
Against this backdrop, Watson discusses the opportunities available to infrastructure investors in a challenging but ultimately rewarding market.
What landscape is infrastructure investment currently operating in?
While market factors may have slowed M&A more broadly, infrastructure and utilities investors are traditionally long-term investors - investing through the cycle – so we have seen them continue to put capital to work particularly where they can provide high certainty to vendors.
However, there has been a natural rebalancing of expectations between vendors and buyers, but it has been progressive rather than a fundamental re-rating in the sector.
Investors continue to look for opportunities to deploy capital, however processes, similar to other sectors, are taking longer. A changing market environment creates additional complication, but the investors are sophisticated enough to navigate through this. There have been a number of examples where processes have changed shape between commencement and getting to the finish line. While this is impacting the way in which assets are coming to market, we haven’t seen a pullback in investment appetite for high quality, long-life infrastructure assets or assets with strong thematic tailwinds like renewables or digital infrastructure.
What investment themes have been emerging over the past year?
The last year has been dominated by the material movement from the public to private markets with a significant amount of capital taken out of the public market, the so-called de-capitalization of the listed infrastructure space, including landmark transactions where BofA Securities advised on behalf of clients, including the takeovers of Tilt Renewables and Ausnet Services. This demonstrates the breadth of this de-capitalization, ranging from large renewables businesses to significant regulated utilities.
If we look at the pipeline – taking into account the activity levels now and going forward - we think the focus will be on three key industry sectors:
The infrastructure pipeline is focused on three key industry sectors
Renewables
Platforms, large single assets and consistent pipeline of smaller single asset transactions.
Digital infrastructure
The intersection between IT and infrastructure such as data centers, mobile towers and fiber.
Utilities
Regulated utilities that are leveraged to the economy-wide decarbonization story and power generation businesses that need to transition.
As capital becomes more selective, how is this impacting investment choices?
It's playing out in a couple of different ways. The view that investors are taking and should take when assessing a particular opportunity is, where is my differentiation? Where is my value-add? Simply participating in a process where you are just one of a broad field without any angle or differentiation is becoming less and less attractive for investors.
Within renewables and digital, for instance, there are multiple opportunities available to an investor at any point in time which may differ in scale, scope and risk profile, but what we are seeing is a relatively high degree of discipline from investors in relation to which opportunities they are choosing to pursue.
There is an increasing selectivity being shown by buyers and this developing trend is influencing how processes are being run, with greater scrutiny on the selection of the buyer universe and early engagement and education.
In the low-risk free rate, low volatility, low inflationary environment investors were seeking higher returns and moving out the risk spectrum to core plus and value add.
Investors are also now being increasingly selective in relation to core plus and value add opportunities. The broadening of core-plus appetite that has occurred through recent years has started to moderate, with more defensively positioned businesses such as healthcare services currently key focus areas for investors. Given the thematic drivers in healthcare services such as imaging, radiology, pathology, day hospitals, we do not see any reversion of this dynamic.
How are these themes playing out globally and in Australia?
Australia is, and continues to be, a well-developed and sophisticated infrastructure market. We have seen over the past five years an appetite from super funds to go direct, driven by fund inflows and the withdrawal of capital from the public markets.
Global capital is also very active in the Australian market with specialist infrastructure funds, pension funds and sovereign wealth funds well invested in Australia. In a global context, Australia has continued to be one of the most active infrastructure markets BofA Securities operates in.
In terms of global investors and also Australian funds with global reach, there is a relative value assessment that comes into play. They have opportunities to deploy capital across different geographies, and the relative attractiveness of opportunities in Australia are assessed on this basis.
Taking all this into consideration, what’s your outlook for 2023 and beyond?
Continuing momentum in decarbonization and energy transition will mean renewables will be very active. However, in terms of energy transition more broadly, it’s not solely about power. We expect areas of interest will include businesses leveraged to the circular economy and decarbonization of industrial processes, mining, oil and gas.
“Continuing momentum in decarbonization and energy transition will mean renewables will be very active.”
In the near-term we believe that we will continue to see heightened levels of activity around digital assets both in Australia and internationally.
These will be supplemented by more defensively positioned core plus opportunities that naturally emerge from demographic trends, including healthcare services.
Samuel M. Watson, Head of Infrastructure & Utilities, Australia, Corporate Advisory, BofA Securities