Sunday, July 14, 2024

2023: On the minds of infrastructure’s rising stars

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Where are the key opportunities in 2024 and beyond?

Nicholas Pepper

Nicholas Pepper
Member of management, private infrastructure Europe, Partners Group

Nicholas Pepper: Our focus remains on opportunities in the broad decarbonisation, digitisation and new living themes. More specifically, in Europe, we see opportunities offering attractive risk and return in the low carbon fuels, grid flexibility, decentralised energy, circular economy and data centre sectors, among others.

Federica Vasquez: We will consistently invest in essential infrastructure across three verticals. Digital and energy will offer a healthy pipeline of opportunities. On top of these, after post-covid recovery, also the transportation sector will possibly revitalise vs the recent past. We will also continue to screen for build-up opportunities for our portfolio companies.

Iryna Podoliak: Energy transition presents multi-fold opportunities, with growth in renewables and new mobility on the one hand, and the expansion of grids, batteries and addition of flexibility to the system required to support such growth on the other. We also remain bullish on data centres as a function of digitalisation of the industry, growth in semiconductors and generative AI.

Ankur Ajmera: Decarbonisation themes continue to exhibit attractive opportunities. Energy transition is an obvious segment, however other parts of society including transport, waste and resource recycling, and greater electrification all require investment. Personally, I’m also curious to see how digitalisation and specifically AI can improve the way infrastructure managers operate and drive efficiencies. It’s something we’re investigating and developing.

What was the biggest development in infrastructure in 2023?

Federica Vasquez

Federica Vasquez
Managing director, infrastructure, Ardian

NP: Infrastructure’s fundamentals were put to the test last year as rising interest rates, inflation and broader impacts on GDP came to the fore. Despite the challenging backdrop, demand for the asset class remained robust, while the definition of infrastructure characteristics was further sharpened.

FV: Infrastructure sector fundamentals were strong. The energy market showed signs of normalisation, despite geopolitical tensions continuing to pose challenges particularly in regions heavily exposed to fossil fuel exports or directly interested by political instability. With high interest rates, big infrastructure groups had to focus on deleveraging and portfolio reviews, opening up opportunities for carve-out deals.

IP: Market dislocation triggered by the paradigm reconfiguration from the decades-long low interest rate landscape led to heightened caution and slowdown in deal activity. In this world of increased complexity, investors focus on ensuring they are compensated for the risk they take and have become more creative in adopting innovative deal structures.

AA: The rise in interest rates and inflation was an opportunity for infrastructure managers to prove the effectiveness of their strategies. The performance of their portfolio demonstrated whether assets really had traditional infrastructure characteristics. It also pushed the industry further towards driving business improvements to enhance returns, something Ancala has been doing since inception.

How did attitudes towards the energy transition evolve in 2023?

Iryna Podoliak

Iryna Podoliak
Investment professional, Wren House Infrastructure

NP: Investments in the energy transition remained a key theme, with Partners Group investing in several renewables platforms on behalf of its clients. However, while the energy transition was previously more targeted at decarbonisation, we have seen an increased focus on affordability and energy security, considering rising costs and geopolitical turbulence.

FV: We have seen increased awareness of climate change implications and growing opportunities associated with a low carbon economy. Investing to transform companies into energy transition leaders remains a top priority. As an example, we have acquired Attero, leading waste management player, with the view to support its evolution into a circular economy platform.

IP: It is now obvious that energy transition enables achieving a double bottom-line of attractive risk-weighted returns and supporting the net-zero pathway. Infrastructure investors are embracing opportunities beyond the mature renewable technologies, including EV infrastructure, hydrogen and battery gigafactories. To support this momentum, more open dialogue and support from policymakers is required to make new technologies economical and investable for private capital.

AA: Economic pressures have eased subsidisation at ‘any cost’, however we still see positive growth in this space. The decarbonisation targets of large corporates are filtering down in a pre-requisite type manner across wider supply chains, so there is a strong push across more and more companies to source renewable energy and reduce overall carbon emissions.

What were the biggest challenges and how did you overcome them?

Ankur Ajmera

Ankur Ajmera
Partner, Ancala

NP: Transaction volumes have come down. Many launched processes did not conclude and the weight of transaction certainty in a process took an increased importance. At Partners Group, we focused on doubling down on high conviction themes, and within them, attractive assets with a clear path to a transaction.

FV: 2023 has seen a still sustained inflationary environment and slowing growth. Companies have often faced the challenge to continue to invest to maintain and upgrade their infrastructure, with higher than planned investments. Our portfolio companies have shown resiliency in this context, benefiting from strong inflation link, limited GDP exposure and flexible capital structures.

IP: Facing cyclical headwinds, we adapted our playbook to support our portfolio companies in offsetting the impact of higher interest rates through leveraging on operational value creation. From a capital deployment vantage point, we recognised the need to remain laser-focused on fundamentals and back quality businesses powered not only by prevailing secular themes, but with defensible long-term sustainable business models.

AA: Volatility in costs continued to persist, particularly on capex and energy on the back of continued inflation and geopolitical events. We worked closely with our businesses to enhance management focus on risk exposures and support firmer positions on inflation in contract negotiations, which the infrastructure asset class is well placed to justify.

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