Infrastructure Quarterly: Resilience and opportunity: how are infrastructure assets protected in the macroeconomic climate?

Resilience of Infrastructure assets

Core infrastructure assets such as water, electricity, gas, and rolling stock networks are in a unique and monopolistic position. With a steady and often inflation-linked cash flow and a protected market position, these assets will continue to provide opportunities in M&A markets. An example of recent activity includes France headquartered freight leasing services provider Akiem’s proposed sale to Canadian investment fund Caisse de Depot et Placement du Quebec[1]. Despite the current macro-economic climate, we are seeing these high-quality assets remain in demand, and this is expected to continue for the remainder of 2022 and beyond.

Core plus infrastructure assets are typically less protected due to higher correlation to GDP. Debt markets are proving more difficult to predict - as base rates are increasing, so is the cost of debt. Lenders are also becoming more cautious in areas with prevailing issues and geographical risk territories. Critically, however, debt markets remain open for infrastructure assets – demonstrated by the increased refinancing opportunities, despite other debt markets remaining closed. An example of this is the recent Corelink Rail Infrastructure’s refinancing that took place in September (DC Advisory acted as the financial advisor to Corelink). This illustrates that while debt markets are challenging, and will remain so, there is still momentum in the space.

Decarbonization

With ESG remaining at the forefront of investors’ minds, the ongoing trend surrounding decarbonization and the pivotal role of transportation, continues. The EU has pledged to become climate neutral by 2030[2], and consequently the development of sustainable transport infrastructure will likely play a critical role in ensuring this pledge is met[3]. We expect that this will inevitably mean infrastructure investment continues.

We expect the pressure of the pledge deadline against the geo-political disruptions to gas supply to lead to an influx in ESG focused rail, road, and aviation M&A opportunities. Germany is heavily exposed to the impact of oil and gas shortages following Russia’s decision earlier this year to shut down gas deliveries through Nord Stream 1[4]. Germany has also reduced its reliance on nuclear power, pledging to cut its supply completely by April 2023[5]. However, the Russia-Ukraine conflict and Germany's exposure to gas deliveries being shut down have accelerated alternative energy sourcing projects. This can be seen with Glennmost and MN, as they are expected to invest EUR 700M in renewables expansion across Europe from the next quarter of 2022[6]. The offshore wind market is also accelerating on the back of energy sparsity. Examples include Manor Renewable Energy’s (MRE), UK-based provider of engineering and fleet services for the offshore wind sector, acquisition of German maritime transport services firm OPUS Marine in a push to double its fleet size[7]. This can also be seen in the Benelux region, following Octopus Energy’s acquisition of the Borssele W offshore wind farm[8]. This activity indicates that despite market turbulence, there continues to be ongoing opportunities in the renewables sector, as a result of Europe clamping down on its emission commitments.

Opportunities for European investors in US infrastructure

Many European infrastructure funds, including Antin[9] and Igneo[10], have been establishing a greater presence in the US since 2020 given their desire to diversify their geographical mix within their funds aligned to ever increasing investment opportunities available. Now, with renewed focus from the US government’s USD 1TN pledged investment to improve national infrastructure[11], new funding will likely enable and unlock undiscovered avenues[12]. This has been further driven by the Inflation Reduction Act signed into law in August 2022, which establishes several funding opportunities and subsidies for key infrastructure industries[13]. With the influx of funds dedicated to the sector, we can expect to see an increase in M&A activity, predominantly in sub sectors including railroads, fibre and data centres, as these are areas that have attracted attention from European investors.

The Russian-Ukraine conflict has accelerated interest in renewable energy in the US and is most evident in the onshore wind and solar sectors, as they are the most advanced in the US market[14]. InfraRed Capital Partners have recently entered into an agreement to acquire stakes in four wind assets from Algonquin Power & Utilities Corp[15], and we expect to see an influx of activity in that space. Federal investment is helping to de-risk the renewable energy space, however despite heavy investment, it is not enough to plug the gap between supply and demand and the US net zero emission targets set for 2050[16]. Furthermore, while opportunities are present, volatility of the global commodities market is heavily impacting the supply chain, and therefore ability for projects to launch.

Conclusion

There is no doubt that challenging times are ahead, however the opportunity to invest in high quality infrastructure assets remains, and that opportunity will likely continue to be presented to investors in European and US markets. The ongoing ESG themes, for governments and investors, will likely catalyse additional activity – indicating that as ever, the infrastructure sector proves more resilient than others in times of macro-economic turmoil.

References

[1] SNCF and DWS begin exclusive negotiations with CDPQ on the proposed sale of Akiem - 1 August 2022

[2] A European Green Deal, European Commission - 1 November 2022

[3] Clean and sustainable mobility for a climate-neutral EU - Consilium (europa.eu), 15 June 2022

[4] Nord Stream 1: How Russia is cutting gas supplies to Europe - BBC News - 29 September, 2022

[5] Germany to extend operation of three nuclear power plants until April 2023, Balkan Green Energy news – 18 October 2022

[6] Glennmont and MN To Invest €700 Million for Renewables Expansion Across Europe - Mercom India – 23 September 2022

[7] Manor Renewable Energy doubles fleet size via acquisition (renewablesnow.com) – 28 September 2022

[8] Octopus Energy accelerates European expansion by entering the Netherlands’ offshore wind market, Octopus Energy – 29 June 2022

[9] Antin Infrastructure Partners opens office in New York | Antin (antin-ip.com) – March 2019

[10] Igneo Infrastructure Partners to Acquire US Signal (prnewswire.com) – 12 September 2022

[11] Senate Passes $1 Trillion Infrastructure Bill - The New York Times (nytimes.com) – 15 November 2021