Finding resilience in infrastructure investments: Focusing on the mega-trends

Photo by Jackson David, Unsplash

Sponsored article: The stable, non-cyclical cash flows that the infrastructure asset class can provide, writes Jerome Sousselier, are particularly attractive to investors looking to generate steady, predictable returns with low volatility.

Infrastructure investments also offer the benefit of diversification within a wider portfolio.

Against a backdrop of economic fragility and volatility caused by the Covid-19 pandemic, finding investments that exhibit the necessary resilience to keep generating returns means maintaining a disciplined focus on a core set of mega-trends in the energy, digital and mobility sectors. The changes being wrought by these key new trends in certain parts of the market are such that infrastructure renewal is almost an imperative and this in turn yields some attractive opportunities.

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Digital & energy

One example would be the digital infrastructure sub-sector. User habits are being driven by the rollout of digital devices which is prompting significantly increased data consumption. Higher bandwidth and download speeds are also required to support an increasing “work-from-home” requirement and it also needs to power the “internet of things” (IoT) as everyday appliances and machines become WiFi-enabled so as to function more efficiently. The great majority of existing telecoms infrastructure cannot support the increased levels of connectivity that are required, meaning an ongoing need for the rollout of optical fibre networks, data centres, sub-sea cables and radio towers.

For the energy and utilities sectors there are a number of catalysts driving the need for new investment to enable the energy transition. On the one hand there have been technological advances in energy production prompted by the push for decarbonisation, eg., solar, wind, which inevitably requires new infrastructure investments.

Alongside, there is the need to upgrade and integrate Europe’s energy grids so as to form “smart grids”, allowing for supply and demand to be met with greater intelligence, thereby reducing overall energy consumption. Another key area is security of energy supply, given an increased reliance on renewables, and this means a focus on energy storage solutions, batteries and back-up power.

SDGs

A common theme here is sustainability. A large part of the pressure to improve and upgrade infrastructure comes from the social and environmental imperatives that increasingly govern energy generation and consumption. ICG’s Infrastructure equity strategy team takes the view that a clear route to downside protection is to invest in assets which are focused on sustainability. To that end, the team has done two things: it has aligned its strategy to the UN’s Sustainable Development Goals and actively monitors the impact of the fund’s investments on four relevant UN PRI goals that we have selected and it has decided to focus mainly on investments linked to energy transition (renewables, energy efficiency, smart meters) and digital infrastructure—both sectors having also demonstrated their resilience over the last few months.

In order to optimise the risk profile of an investment, we think it is also important to focus both on smart structuring ie, investing across the capital structure (equity and quasi equity) which affords us additional downside protection and also that we source primary transactions from and in conjunction with corporates ie, corporate spin-offs and funding growth and/or capex of established corporates.

Jerome Sousselier is managing director of ICG’s Infrastructure Equity Strategy.

For institutional/professional/accredited investors only.

Photo by Jackson David on Unsplash