Changing priorities for infrastructure investors

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Investors are discussing how technological change and the new green economy are revaluing infrastructure assets, as well as the trend to replace fixed income securities with infrastructure debt. But investors should not lose sight of the characteristics of traditional infrastructures in their quest for new trends. Predictable cash flow and downside protection remain essential.

Speaking at FIS Digital 2021 as part of an expert panel on infrastructure investments, U.S.-based Cohen & Steers head of global infrastructure, Ben Morton, explained how the company is focusing on investing in companies that “charge a fee”. He added that the company buys listed infrastructure assets that have economic sensitivity that is suitable for active management.

“Investments are linked to GDP or have pricing mechanisms that tie income to inflation, providing protection against inflation throughout the cycle,” he told delegates.

Commenting on President Biden’s plans for a significant investment in infrastructure, he said that contrary to the previous administration’s promises, this fiscal stimulus could benefit listed infrastructure. He said Biden’s plans are different and could have significant consequences for investors, for example, when it comes to tax cuts and renewables. The extension of tax credits for solar and wind power makes these projects more profitable, he said. Elsewhere, promoting the development of 5G will allow greater penetration of tower companies, and investing trillions in the economy is good for economically sensitive companies like freight railways.

Exceptional opportunity

Investors can find infrastructure opportunities in long-term, fixed-rate and guaranteed assets and earn a yield premium over corporate bonds, said colleague Dominic Swan, global CIO of private debt at HSBC Asset Management. Higher returns can be found in non-investment grade allocations, but he cautioned that this should not be viewed as a long-term strategy.

“You don’t want to take 25 years of exposure to a high yield asset,” he said. Swan also noted that if inflation does not increase cash flow, it raises the market value of an asset so that in times of high inflation, infrastructure credit risk decreases. He added that this is factored into the way debt products are priced in the market, providing an exceptional opportunity.

Infrastructures for entry, exit of fixed income securities

HSBC’s Swan also noted trends among investors switching from fixed income to infrastructure debt.

“We find people selling government bonds and replacing the allocation with investment grade infrastructure,” he said, noting a 70 to 100 basis point rally in the investment grade space.

But investing in infrastructure in today’s climate presents challenges. At the Alberta Investment Management Corporation of Canada, Ben Hawkins, senior vice president, infrastructure, said investor demand for infrastructure as a replacement for fixed income has driven up demand, but there is no not a lot of new offering.

Its areas of intervention include renewable energies, telecommunications and digital infrastructure in view of new trends in remote work. That said, not all opportunities fit into a traditional infrastructure mandate, and he warned that means risks and uncertainties dominate.

Other trends include data increasingly helping to address intermittency issues in renewables and reduced capacity issues facing utilities today.

“We are looking at the digital sphere to optimize service delivery,” he said, referring to the need to sustain traditional assets.

Technological disruption

This has led the conversation to the danger of infrastructure assets becoming obsolete in the new green economy. The number of stranded assets could soar in traditional energy infrastructure as well as assets subject to technological change, Hawkins said.

However, he argued that traditional gas pipeline infrastructure is less likely to be blocked during the transition. Gas will continue to be an important part of the energy mix, he said.

Elsewhere, technological disruption is increasing in satellite space. Advanced technologies provided by high-speed internet like Netflix on demand are disrupting the traditional services of cable and satellite providers.

“We have to be on top of this change,” he said.

However, he cautioned investors not to lose sight of the characteristics of traditional infrastructure in their quest for new trends. Predictable cash flow and downside protection remain essential. Additional investments are being made in new themes, but we are not going to start investing in new companies that do not have similar characteristics to infrastructure, he said.

At HSBC, the strategy is focused on exploring the fundamentals, namely the stability of cash flow. In this aspect, renewables and digital infrastructure differ from renewables often linked to quasi-guaranteed cash flows comprising long-term contracts with lower volatility.

In contrast, digital assets are generally subject to huge changes as the revolution continues. Hence the need to adopt a shorter time frame when investing in digital assets.

“Since we are exposed to change, and change is not a friend of debt holders, we expect to be paid for the risk of technological obsolescence,” he said.

Responding to questions about competition for assets, Hawkins noted how investors are moving up the risk spectrum and said renewables prices are increasingly being priced to perfection.

AIMCo’s strategy has taken a platform approach in which the investor bypasses the competition by acquiring operational assets with particular emphasis on the skills of the field team, leveraging their operational and specific knowledge. to the sector. This equates to less congested trade, he concluded.

Asset owner:

Alberta Investment Management Corporation (AIMCo)

Sarah Rundell is a writer for Top1000funds.com based in London. She writes on institutional investing in all asset classes, global trade and corporate treasury.



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