How resilient is infrastructure to global crises? And where could we expect the industry to go in 2020 and beyond? Our speakers at SuperReturn Global Infrastructure discussed how the industry fared in the recent pandemic, the factors that made it more resilient than others, and explored the investors' favourites of the industry.
The resilience of infrastructure
Infrastructure as an asset class has been very resilient and stable over the last few decades, and there are now questions as to whether it will withstand the waves of pandemic impact.
Our panel delving into the resilience of the asset class to global crises agreed that it is important to take a long-term view rather than looking at the initial impact. So far, the observations are that infrastructure is living up to its reputation of being stable and resilient, but it’s important to see if the underlying investments actually have these core characters of a robust business model that we expect them to have.
It’s an opportunity for us to separate the wheat from the chaff.
Investors tend to do well when they know the implicit conditions in which they base their investment decisions on – but when it comes to COVID-19, they have less control and understanding over the situation. This will be an opportunity for us to separate the wheat from the chaff as we find out which managers actually have what it takes.
Investment selection is an important part of this, and you need to have a portfolio that can withstand a range of unexpected crises to help you ride out the storm. For example, there is a huge amount of differentiation between how different sectors have fared in this pandemic. Retail and leisure have been hit hard in this environment, while logistics and digital infrastructure has thrived. Although this might not be surprising for most investors – the size of the shock might have been unexpected by many.
While size might have been seen as a factor contributing to the resilience of a fund, this is not necessarily the case. The difference in governance between mid-sized and larger caps changes their flexibility and adaptability when it comes to the speed of the decision-making processes and reacting to situations – and this is crucial in a crisis. Execution, rather than size, determines resilience in this case.
The government’s first reaction to combating the financial troubles caused by COVID-19 is to put money into a lot of sectors. The EU’s recovery plan has lots of money planned for sustainable infrastructure. In general, both the developed and developing markets are seeing more opportunities in sustainable infrastructure as the energy transition grows and the push for green is set to continue.
Government funding also has a place when it comes developing the “infrastructure of the future”. There are lots of innovative and important new technology out there that are not getting enough investor interest yet that could be crucial to the future of infrastructure – such as more efficient batteries, carbon capture or new, more efficient ways of generating sustainable energy. The setting of regulatory signals for these asset classes would be important in attracting long-term investors into funding these projects.
What about the future?
The difficulty is selecting the right investment considering trends like accelerating technological change and climate transition.
Governments and businesses are both under pressure to ensure that ESG are a part of pandemic recovery plans – so what effect has this had on the infrastructure industry? What are some of the trends that had emerged? We spoke to Gregory Smith, President & Chief Executive Officer at InstarAGF Asset Management Inc. about why it is key to put the communities first.
The push for sustainability, ESG and impact investing is set to continue. This trend is further driven by COVID-19, but fundamentally the acceleration in this field has been environmental and people paying more attention to the changing weather phenomenon we have been observing over the years. Social empowerment is also considered an increasingly important point of focus in driving sustainable infrastructure projects, as for a long time the E and G had been getting most of the attention. Developments in renewables and energy storage are also areas investors will be keeping a close eye on as newer tech and innovation come to the table.
Overall, appetite for infrastructure is still considered strong, and possibly even growing. It’s a young asset class, but the industry has matured since the last financial crisis and hopefully it will continue to be resilient with long-term investments views.