1 September 2023
As countries across the world seek to modernise and expand their infrastructure, vast levels of capital will be required to meet demand in the coming decades. The last few years have already seen record fundraising across multiple sectors, with infrastructure and natural resources fundraising hitting an all-time high of $US158 billion in 2022.1
Following the global disruption of the last three years, countries are looking to build greater energy and supply chain security. This has driven steady investment in the global infrastructure sector despite geopolitical tensions, high inflation and rising interest rates. Along with increasing demand for digital infrastructure and the need to meet growing global decarbonisation objectives, they are expected to continue driving infrastructure investment despite challenging market conditions.
Against other sectors, infrastructure represents a long-term safe haven with stable cashflows, according to Plern Bonython, Associate Director at Macquarie Capital. Although infrastructure fundraising dipped sharply in Q1 of 2023, she expects to see this begin to recover in Q2, "Q1 was lower than expected, but I do expect that in the second half of this year, we should see closes of some mega-funds finally coming to fruition. I’m hopeful that 2023 will be a decent fundraising year, even though it’s unlikely to set any records."
The need to modernise and update existing infrastructure in the US has long been a driver of infrastructure investment there. The American Society of Civil Engineers’ 2021 report card for America’s infrastructure indicates a need for cumulative investments of $US6 trillion between 2020 and 2029. Of that, only $US3.3 trillion is currently funded. Addressing this deficit remains a priority despite challenging market conditions. Amongst the initiatives underway to renew US infrastructure is the Bridging Pennsylvania Partners joint venture between Macquarie Capital and S&B USA Concessions to finance, build and maintain six interstate bridges across Pennsylvania, which reached financial close in December 2022.
This continued investment into large-scale infrastructure projects also serves as a reminder that infrastructure is an attractive asset class, in part, because of its resilience and inflation-protected nature. "It's not all about high growth," Bonython comments. "It's about how long this asset is going to be around. Is it providing an essential service to communities? And in most cases, the contract tenors are for 20 years or longer. Concessions can be 50 years or more in some sectors, and usually those contracts have inflation protection.
Interestingly, a similar resilience can be seen in energy linked-related asset classes. "Dry powder reserves are now waiting to be deployed, particularly into decarbonisation and ESG-driven investing," says Ankit Vanjara, Managing Director at Macquarie Capital. "A lot of capital is required to meet decarbonisation objectives." According to The McKinsey Global Institute, $US9.2 trillion in annual average spending on physical assets is needed to achieve global net zero emissions by 2050.2
This has also broadened investors’ risk appetite to look beyond traditional core renewables of solar and wind, resulting in a growing interest in sectors such as offshore wind, distributed generation solar projects, battery storage, hydrogen, biofuels and carbon capture assets. Macquarie Capital has recently advised on several transactions that exemplify this shift, including DIF Capital’s acquisition of Green Street Power Partners, a national developer, owner and operator of solar energy systems with over 2 GW of projects in its pipeline, and Manulife’s acquisition of PowerFlex, a provider of intelligent solar, storage and electric vehicle (EV) charging solutions.
The current economic climate and geopolitical tensions have had a dampening effect on investments more recently, with a smaller pool of investors bidding for opportunities resulting in a buyer’s market. In some instances, offers have failed to meet sellers’ valuation expectations, leading to a pivot to structured equity or debt financings.
Bonython says that while deals are taking longer, purchasers can benefit from a higher conversion rate. She has witnessed greater bidder exclusivity in the second round of processes and the reimbursement of transaction fees or other concessions being offered in some cases.
Bonython also believes a healthy appetite remains for infrastructure platforms that have identified, scalable growth pipelines and existing operating portfolios that are generating cashflow to help fund future development. Brookfield Renewable’s recent acquisition of Duke Energy Renewables for $US1.05 billion demonstrates that large platform trades can still be achieved, though there is increasing caution around valuation. The Duke Energy platform has 5,900 megawatts of wind, utility scale solar and storage assets operating and under construction and plans for 6,100 megawatts in future development.3
To address dislocation in the debt markets and provide downside protection, many infrastructure sponsors are looking at more structured equity deals, helping to narrow the bid/ask gap between buyers and sellers, and giving the seller an option to preserve upside once the market normalises. Bonython explains, "If a seller thinks they should get $US600 million for something, but the buyer is only at $US400 million, in order to give the seller some retention of the upside, you can do a preferred equity solution versus common equity." Such deal structures will enable buyers and sellers to overcome any differences over current valuations and take advantage of a compelling longer-term outlook.
The role of infrastructure extends beyond the delivery of specific assets and is now much more about enabling the needs of society."
Managing Director at Macquarie Capital
Previously, infrastructure investment was centred around hard assets, transportation and government initiatives to promote economic growth. Today, infrastructure investment and development is more decentralised and there is increased involvement from the private sector. Corporates and infrastructure funds, for example, are playing a greater role in increasing connectivity through the development of fibre networks and data storage facilities. Meanwhile, traditional energy majors are increasing their investment into renewables and energy transition developments to meet corporate ESG goals and serve current national and global priorities.
Vanjara believes that the world has moved past the mass production age and is now entering the personalisation age, which he says requires "a step change towards the digitisation of infrastructure assets." He mentions that this will include investing in assets such as smart cities, hybrid working environments and EV charging facilities.
This expanded definition of infrastructure makes the investment climate more compelling and creates additional avenues for capital to be deployed. "The role of infrastructure extends beyond the delivery of specific assets and is now much more about enabling the needs of society," says Vanjara.
"Global ESG priorities paired with the recognition that technology and the digital environment will continue to drive everyday lives will supercharge infrastructure’s evolution," says Vanjara. "Ambitious developments will demand immediate capital, but they will typically deliver revenues long into the future."
This publication represents the views of the Macquarie Capital Infrastructure Advisory team and is not a product of Macquarie Research.