Investment Review
Infrastructure
Strong global demand for infrastructure assets in 2019 was supported by sustained low interest rates and investors’ continued search for stable cash flows.
The year was characterised by keen competition and elevated valuations for unlisted assets, strong fundraising activity, and an increased focus on attractive sub-sectors such as renewable energy and digital infrastructure.
Two of the largest unlisted infrastructure funds ever raised, amounting to more than US$40 billion combined, received substantial interest from investors during 2019. This was symptomatic of infrastructure’s gradual transition from the fringes to a more mainstream role in investment portfolios, as a unique source of diversification, stability and attractive risk-adjusted returns.
The valuations of unlisted assets were underpinned by high levels of dry powder, or funds allocated to infrastructure but yet to be deployed, in the market. However, listed infrastructure securities fared less well in general, hampered by regulatory and political uncertainties in certain markets.
Over recent years, infrastructure investors have increased their focus on a small number of important sub-sectors, some of which may now be developing into standalone asset classes. Among these, renewable energy continued to attract capital in 2019 as wind and solar increased their share of new power generation and displaced conventional sources of energy. Digital infrastructure assets such as telecom towers, fibre optics and data centres also received growing interest from new and established investors as valuation multiples on core infrastructure assets in transport, utilities and energy continued to edge higher.
Against a backdrop of positive market conditions, 2019 was another strong year for ADIA’s Infrastructure Division. The team has built a diverse portfolio of high quality assets and, during the year, returns were driven by strong dividend income, as well as capital gains from exited investments.
While remaining an active acquirer of new assets, the team’s key focus in 2019 was on follow-on transactions and investments through existing portfolio companies, reflecting the highly competitive nature of many auction processes.
The Division now oversees an extensive renewable energy portfolio, holding interests in a number of platforms which account for more than 15 gigawatts of power generation capacity. The team’s long-term approach and understanding of the risks and opportunities arising from climate change has resulted in a portfolio that is both resilient and well positioned for the future. In 2019, the Division increased its stake in Renew Power, an Indian renewable energy developer, and continues to see opportunities to grow its renewable energy exposure through new and follow-on investments in the sector.
During the year the Infrastructure Division increased its investment in Cube Highways, an independent roads owner and operator in India, and successfully divested its remaining stake in Gatwick Airport, held since 2009, alongside its partners. It also deployed more capital into Cellnex Telecom SA, Europe’s largest independent telecom tower company, an investment that reflects the team’s increased focus on opportunities in digital infrastructure.
Early in 2020, the infrastructure investment landscape shifted as a result of both the outbreak of the Covid-19 virus and dislocation in commodity markets. The impact varied across infrastructure sub-sectors, with transport and energy assets generally facing greater liquidity challenges than utilities and telecom assets.
Dry powder levels remain high, indicating buyers will still be in the market for what are fundamentally defendable assets. Nonetheless, we expect volumes of private transactions to decline, both because of the public-private pricing differential as well as uncertainty surrounding the length of the downturn and shape of the recovery. Some repricing of unlisted assets is likely, as evidenced already in the public markets. Volatility is to be expected in the listed space linked to the market response to the Covid-19 outbreak, geopolitical events and central bank policy.
In the year ahead, ADIA’s Infrastructure Division will focus on supporting existing assets in the portfolio and selectively pursuing transactions that offer an attractive risk reward profile.
The Division’s current portfolio has significant scale and is highly diversified by geography and sector, and we believe there remains considerable potential to support the growth of our portfolio companies through follow-on investments.
The competitive environment for unlisted assets means that we will remain selective in targeting market leading assets alongside partners that meet our risk-return criteria. Given the existing size and maturity of the portfolio, our focus in 2020 and beyond will be on larger scale acquisitions.
Infrastructure is not immune to the longer term market forces currently disrupting other asset classes, such as rapid advances in technology and climate change, but it is more insulated, and it remains a source of stable, predictable cash flows. Nevertheless, the team closely monitors the trends that could influence infrastructure asset valuations in the future to ensure its portfolio remains well placed to deliver long term, sustainable returns.