Funds Europe – How does the current economic climate impact the outlook for infrastructure investing and for private assets in general? Are corporates in this sector particularly affected by the pandemic or by the macro backdrop of low interest rates?
Tsoneva – I think that the economic environment is supportive for infrastructure investing and overall for real assets. The economic rebound is relatively strong, many of the economies in Europe are reaching pre-pandemic size, and we expect that this growth will continue in 2022. Hopefully the spike in inflation is transitory, but even if it isn’t, the hedge that infrastructure provides for high inflation is there. In a high inflationary environment, infrastructure is probably one of the obvious choices. The key risks that we monitor are monetary policy, that is when interest rates will start creeping up, and the supply-chain bottlenecks that we continue to see.
Chladek – We believe infrastructure investment is an attractive asset class as it resilient to the economic cycle and the current economic climate has supported this thesis. When considering infrastructure investments, we really focus on the essentiality of the underlying assets and the likely resilience of the businesses.
In infrastructure sectors where performance has been more correlated with GDP, we have seen some negative impact of Covid and the economic climate; however, overall we have been pleased with their resilience and subsequent recovery.
That said, across many infrastructure sectors we are invested in – such as sustainable energy generation and storage, utilities and fibre – the current economic climate has had limited impact and, given the critical nature of both existing assets and new investment, we believe the outlook is very good.
Lyse – What we hear from the market is that the outlook for infrastructure investment is strong due to the Covid-19 stimulus packages. Traditionally, infra is a way for governments to spend themselves out of a crisis, create jobs and help get the economy back on track. Even though this session has a European focus, we’re all aware of the $1.2 trillion (€1.1 trillion) in the Biden package that will invest in a lot of different types of assets, including the energy transition and broadband that we’ve talked about.
I think it’s true also for the other types of private assets that we see in general. Real estate, which struggled a bit through the pandemic, is coming back very strong now. Also, private debt and private equity are doing really well, so there are lots of opportunities out there for different types of managers, and infrastructure is certainly not an exception.
Chladek – A key attraction of infrastructure investment is it should provide a strong degree of inflation protection. In a higher inflationary environment, investors will look for their infrastructure investments to be resilient to this, whether through regulated returns, contractual arrangements where revenues are index-linked, or just a natural ability of these essential businesses to recover inflationary impacts through their pricing and revenues.
Tsoneva – Exactly. With most of the infrastructure assets, you have very high barriers to entry and even monopoly or monopolistic position. In regulated sectors the link with inflation is often explicit, and the same under many toll road concessions. But even if there is no explicit link, infrastructure companies should be able to recover inflation because of their market power.