Martin Lennon discusses key investment themes in 2021

How has COVID-19 affected UK and European unlisted infrastructure?

Given how wide-ranging the impact of COVID-19 has been, I will focus on the most significant areas. 

First, as an owner of a significant infrastructure portfolio, we have been understandably focused on our existing assets. Pleasingly we have seen clear and demonstrable resilience across our portfolio. We have been working ever closer with our management teams to understand and address immediate challenges and assess how the future environment may evolve. We have also adapted both the frequency and detail of our reporting to clients.

On the investing front, we’ve had a busy year. Most of our deals are proprietary in nature or face limited competition. As such, we benefited from discussions with asset owners, contractors, developers, and corporations that had started six months or more before the pandemic emerged. The demand for and availability of new assets has varied somewhat across the different sectors – patronage-based assets, particularly in transportation, have understandably required a higher degree of caution, whereas contracted revenue businesses have continued to see strong demand.

After an understandable period of flux in the second quarter of the year, fundraising continued positively, though the inability to travel and thus have face-to-face meetings has, and indeed continues to have, an impact for certain clients and situations. Demand for the asset class appears to remain strong, with investors continuing to value the resilience of infrastructure and its ability to deliver yield, particularly at a time when other markets appear more unstable. 

What challenges have you experienced in deploying capital? 

As it related to COVID-19, one of the major impacts in March/April of last year was that many construction sites were forced to stop work by the lockdown rules. However, quite quickly governments made a distinction between essential and non-essential works, benefiting certain forms of infrastructure. For example, fibre optic broadband operation and roll-out was considered an essential activity, and a significant amount of investment was made and work undertaken throughout the year. There were still certain issues around access to homes given social distancing requirements, but a great deal of progress was made nevertheless.  

From our point of view, and it's one of the key components of our greenfield strategy, we tend not to favour big one-off construction projects. Bigger projects can present a more binary delivery risk exposure and therefore a significant impact on fund performance. We prefer to target smaller construction packages, combining them to create a platform business approach. Our own fibre broadband businesses are a good example of how this works in practice.

It does seem as though the construction sector is less keen on fixed-price, lump-sum, turnkey contracts than we have experienced in the past. We’ve been looking at second- and third-tier-type contracting organizations – smaller businesses – and widening our relationships. This provides the opportunity to deliver an enhanced level of diversification protection which, in tandem with in-house management expertise, can drive meaningful value. 

What do you see as the key trends for investment in 2021?

A big ongoing trend is telecommunications, which we have long been invested in. COVID-19 has made everyone increasingly aware of the importance of effective digital communication infrastructure. Countries like the UK, Germany, and Poland are lagging behind other countries in connecting fibre to the home, which means there’s a lot of capital that needs to be deployed to meet their targets. Also, 5G remains an interesting development that will require a greater density of mobile towers to realise its potential – which again means more investment. 

The National Infrastructure Strategy has widely recognized the need to mobilize private investment to support the UK’s economic recovery, and are finding innovative ways of facilitating this. Our involvement in the digital landscape alongside the UK Government has enabled us to deliver fibre connectivity to rural areas which may otherwise be too commercially uncertain to be viable. Structures such as these are helping to crowd in private capital where it is most needed to deliver on Government Policy.

Another key theme is energy transition, and the need for climate investment as the world shifts to a low-carbon economy. Globally there’s potentially going to be more of a focus on climate issues, not least with the Biden administration coming into power in the US. Government support schemes such as feed-in tariffs or Contracts for Difference have been enormously helpful in supporting new technologies, but as sectors mature these may no longer be available. Alternative structures to mitigate price volatility will need to be explored. 

Here in Europe, we see more and more opportunity in the climate technologies sector, across both our greenfield and brownfield strategies. In 2020, we signed our first deal in the electric vehicle (EV) arena. We acquired a majority stake in a leading Nordic EV charging platform, Recharge Infra, in April. The Nordics – especially Norway – are somewhat ahead of the game in the adoption of EVs, and this business already has a significant footprint, both as the owner and operator of public charging points. We see tremendous opportunity for growth in this space. 

More recently we signed a deal in the energy storage arena committing £150mn to Zenobe, which owns and operates intelligent battery storage as well as EV fleet services in the UK, serving about 20% of the EV bus market. This is a really interesting sector for us and again we see a wealth of opportunities in this space.

Committing to be carbon neutral by 2050 inevitably means we will need to explore even more new technologies, such as hydrogen power and carbon capture. Transitioning to EVs is a key component in the shift toward a sustainable future.

Infracapital invests in, builds, and manages a diverse range of essential infrastructure to meet the changing needs of society and support long-term economic growth. We take an active role in all of our investments, whether nascent or large, to fulfill their potential and ensure they are adaptable and resilient. Our approach creates value for our investors, as we target investments with the scope for stable and sustainable growth. Our portfolio companies work closely with the communities where they are based, to the benefit of all stakeholders. Infracapital is well positioned to deliver the significant investment required to help build the future. The founder-led team of experienced specialists has worked with more than 50 companies around Europe and has raised and managed over £6.5bn of client capital across six funds.

Infracapital is part of M&G Plc, a leading European savings and investment business. M&G manages the long-term savings of more than 5 million people and is a major investor in the UK and in the global economy. Total assets under management are £339bn (as at 30 June 2020).