IPF Seminar: Investment in Infrastructure (March 2024) Summary Report

Venue:                Osborne Clarke, One London Wall, London, EC2Y 5EB
Chair:                  Lucy Dale, Macquarie Asset Management
Speakers:           Tim Humpage, British Solar Renewables
                            Andreas Kottering, CBRE Investment Management
                            Angenika Kunne, Aviva Investors
                            James Lydotes, Newton Investment Management

Traditional investors in real estate are increasingly broadening their universe to "real assets”. This panel discussion explored investment in infrastructure, looking at the appeal and also the potential pitfalls.

The panel brought together participants with different perspectives on the market - Lucy Dale concentrates on infrastructure debt, James Lydotes on listed infrastructure, Andreas Köttering and Angenika Kunne on unlisted infrastructure, whilst Tim Humpage is the CEO of an underlying infrastructure investment.

The panel opened with a fascinating discussion regarding the definition of infrastructure. Whilst there was common ground amongst the panellists, there were also significant differences in the detail. The common ground was the provision of services with a high degree of essentiality, highly visible cashflows and high barriers to entry to competitors. Views differed as to whether the cashflows needed to be contractual rather than merely highly predictable and whether or not the underlying essential service needed to be regulated.

There was general agreement that the big driver for investment opportunities are macro trends determining where capital is needed. It is a top-down approach. The vast majority of infrastructure is still owned by the public sector. Where the private sector can participate is a matter of public policy and therefore varies from country to country, as does the nature of the participation. The example was given of the Nordics where the state grants long-term contracts to the private sector for the provision of public transport such as ferries. The provider is paid a fixed amount for providing the service and is thus protected from the volume risk usually associated with transport infrastructure.

There was an interesting debate as to where infrastructure development fits into this. It was agreed that there is a big difference between infrastructure development and long-term ownership. One of the panellists suggested a segmentation of the market that will be very familiar to real estate investors – core / core-plus / value add / opportunistic. Some traditional investors in the long-term hold phase are now investing in the development phase. Their reasons may vary and may or may not include developing assets that they want to hold for the long term.

One specific area of interest was investment in renewables. The view was expressed that from 2010 to 2015 the investors in renewables were specialists who really understood the market, but this has changed significantly since then. There is now a wall of capital for renewables, and the view was expressed that this capital exceeds the amount of currently investable opportunity.

The panellists were asked to think outside the box and identify some interesting opportunities. These included:

• Telecoms. This was described as generally an awful business but towers and fibre lines are a good investment in countries such as France where regulation restricts competition;

 

• Decarbonisation and transition is generally on the radar but there are also opportunities in specific areas such as recycling facilities;

 

• There are opportunities in out-of-favour traditional infrastructure such as water utilities;

 

• Are gas pipelines a stranded asset or is there an opportunity to use at least some of them for hydrogen?

 

• District heating and heat pumps will be hugely important. Is there a model for infrastructure investors to back this?

 

• Energy storage;

 

• The amount of investment required in the UK energy grid is enormous.

 

A comment element to all of this, which picks up on the earlier discussion as to where the boundary sits between public and private, is the importance of social capital. The general public needs to be brought on the journey to support private investment.

An interesting question from the audience was what the real estate industry could learn from the infrastructure industry’s relationship with the government. It transpires that the infrastructure industry, like the real estate industry, also does not feel that it particularly has the government's ear. One panellist felt that in the UK, it is rather easier to engage with the official opposition…..

The panel concluded with a discussion of the changing sources of capital. One aspect of this that also chimed with a real estate audience was the increasing interest in democratisation and retailisation.
 

John Forbes

9^th April 2024

 

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