Infrastructure

Demand for infrastructure assets scaled new heights in 2018, as investors continued to seek out the asset class for its diversification characteristics and reputation for relatively stable returns.

Case StudyWestconnex

WestConnex is a major infrastructure project comprising concessions over the M4, M5 and M4‑M5 Link motorways in Sydney, Australia. WestConnex will support Sydney’s long‑term economic and population growth with improved transport access and connections to western Sydney, key employment hubs and Sydney’s major international gateways at Sydney Airport and Port Botany.

In 2017, an ADIA subsidiary collaborated with well‑aligned and proven partners – Transurban Group, AustralianSuper and Canada Pension Plan Investment Board – to participate in the process for the New South Wales (NSW) Government to privatise a 51% stake in WestConnex. The consortium, Sydney Transport Partners, was one of several international groups bidding for the asset.

As part of its bid, the consortium was required to conduct a detailed assessment of construction and traffic risks and seek the approval of competition and foreign investment regulatory bodies.

In August 2018, the NSW Government selected Sydney Transport Partners as the winning bidder for the 51% stake in the entities holding the WestConnex assets. The acquisition included three distinct toll road concessions, at different stages of development.

In addition to its investment in WestConnex, the ADIA subsidiary also participated in Transurban Group’s equity raising on the Australian Securities Exchange, highlighting an ability to participate actively in both listed and unlisted markets to support our partners. This also followed an earlier successful investment alongside Transurban Group in the Queensland Motorways network in Brisbane, Australia in 2014.

Various sections of the M4 Motorway opened to traffic in 2017, while other sections of the infrastructure project are expected to reach construction completion and open to traffic over the coming years. The twin 7.5 kilometre tunnels of the M4‑M5 Link are due to open in 2023.

In addition to more established investors, growing interest from pension funds and insurance companies helped to underpin the market even as valuation multiples continued to climb.

One sector that attracted interest in 2018 was renewable energy, reflecting its growing maturity and acceptance as a clean and viable alternative to power generated from fossil fuels. This trend will continue in both developed and emerging markets, particularly as wind and solar energy prices approach, or fall below, parity with more conventional sources of energy.

For ADIA’s Infrastructure team, the market’s continued strength resulted in another year of solid performance, with strong dividend income and capital gains across the portfolio.

Despite the more competitive landscape, the Infrastructure team also successfully deployed more than $2 billion to new and follow‑on investments. Among these, ADIA was part of the successful consortium to acquire a 51% stake in WestConnex, the largest road infrastructure project in Australia (see case study). It also acquired a 5.2% indirect stake in Cellnex Telecom SA, Europe’s largest independent telecom tower company, with a network of more than 28,000 wireless telecommunications sites across the Continent and the U.K.

The Infrastructure team also allocated additional capital to existing investments, including the U.K.’s Anglian Water and Indian renewable energy company Greenko (see case study).

Heading into 2019, there are few signs of a slowdown in demand for infrastructure assets, which will likely ensure that valuations remain at elevated levels.

Outlook

In 2019, investors are likely to continue to diversify their strategies and explore new markets such as China and India, as well as major markets in Latin America. Investors are also becoming more willing to take on construction and development risk in exchange for higher expected returns.

In addition, certain asset types once deemed less attractive are being reassessed as views around technology and obsolescence continue to evolve. One such example is telecoms, as demonstrated by the Infrastructure team’s investment in Cellnex. This is due to the massive capital requirements needed to build infrastructure to accommodate the growing demand for data, network digitisation and 5G delivery.

Case StudyGreenko

Based in Hyderabad, Greenko has been one of India’s fastest‑growing independent power producers since 2006, focusing on developing, building and operating renewable energy power plants.

Greenko’s emergence coincided with a concerted push by the Indian Government to increase renewable energy capacity to 175 Gigawatts by 2022. This included 100 Gigawatts of solar capacity and 60 Gigawatts of wind capacity. Its targets were driven by, among other factors, a deficit of power production in India, growing per‑capita power consumption, and the declining cost of renewables.

In 2015, ADIA analysed India’s renewable energy market and identified Greenko as an attractive market leader, with sufficient scale, a self‑development business model, and experience in wind, hydro and solar energy generation.

By 2016, ADIA had acquired approximately 15% of the company and established a strong relationship with the Greenko team and other investment partners. It has since supported the company in its growth path from less than 1GW of operating capacity in six states to more than 4GW of capacity in 15 states – enough to provide power to 2.3 million households.

This growth effort has entailed acquiring and/or developing over 90 sites and directly employing and training over 2,000 people. It has also involved interacting closely with local partners and stakeholders, providing education, skills development, healthcare, rural development and a host of environmental activities.

Since ADIA’s investment in Greenko, India has made substantial progress in achieving its targets and the price of renewable energy has continued to decline. This has led the Indian Government to respond by further increasing its target for renewables to 225GW in capacity by 2022.

Against this backdrop, Greenko remains well placed to play a leading role in the decarbonisation of the Indian power market.

ADIA began allocating funds to infrastructure in 2007, through a flexible mandate that enabled it to invest globally, in equity or debt, direct or through funds and in both unlisted and listed assets. Since then, the Infrastructure team has successfully built a substantial and diversified portfolio across regions and asset types that has exceeded its benchmark over the same period.

Going forward, the team will seek to balance its strategy between continuing to grow its portfolio with value‑enhancing investments, while increasing its emphasis on asset management. This will involve ongoing, in‑depth analysis of the underlying value drivers and risks within the portfolio.

In seeking new opportunities that meet its risk‑return criteria, the Infrastructure team’s preference is for bilateral negotiated transactions. However, it will also continue to participate in competitive auctions for large, market‑leading assets in its preferred sectors, alongside experienced partners.

Given the size and maturity of the portfolio, the value of new investments is likely to be higher on average than in the past. However, the team will also continue to make follow‑on investments in existing assets as demonstrated by its participation in capital raisings by Indian renewable energy companies Greenko and Renew Power, among others.