Tim Sheddick, partner at Shearman & Sterling, highlights the following key themes he believes will dominate the infrastructure sector in 2020.
“2019 was a record year for infrastructure funds and we expect the big fund raising from key managers to continue well into 2020 and beyond. However, investors looking to take advantage of infrastructure opportunities should be aware of the following key areas in 2020:
- How funds invest – the optics of how investors do deals and how they invest will be increasingly important. Reputation management and public perception are crucial. For example, when it comes to responsible and sustainable investing, companies need to ensure they have the right policies in place and also proof that they have applied them. This is particularly true in privatisations. Whilst vendors are keen to get the highest price they must also show the public that they have sold to a reputable investor who is sustainable and responsible.
- Climate change – is likely to become a tipping point in the way people evaluate opportunities. For example, if there are two relatively similar assets, but one asset is better at managing its carbon emissions, that asset will increasingly be seen as having a premium, which tips the balance in its favour. In financings there is now the potential to get some pricing advantage from showing a positive environmental impact. In this area we are seeing a growing trend that you get a pricing advantage if you hit certain environmental or sustainability targets.
- Green bonds – changes to EU rules are likely to make green bonds become more mainstream. The European Commission has recently launched the green taxonomy to determine whether an economic activity is environmentally sustainable and they aim to start to rolling it out more widely. This will likely mean more investment in infrastructure green bonds in 2020.
- Geopolitical (un)certainty – finally, an overriding issue over the last year in global infrastructure has been political uncertainty, particularly in the U.K. Following the result of the recent general election, the nationalisation risk has been significantly reduced and therefore we may expect to see a number of transactions in the U.K. regulated sector as assets are disposed and acquired.
In conclusion, the infrastructure sector is subject to many of the same issues and scrutiny as other sectors yet it continues to thrive. In recent years, we have seen significant fund raising and an increase in the number of investors and the size of allocations to infrastructure globally. This is showing no signs of slowing down with a number of large direct investors (large pension funds/sovereign wealth funds) looking to increase their exposure to infrastructure significantly over the next five years. For example, Caisse de dépôt et placement du Québec (CDPQ), one of Canada’s biggest state pension investors, plans to potentially double its allocation to infrastructure to as much as 15 percent over the next four years. We are expecting to see continued weighty investment in infrastructure but significant growth will depend to some extent on political developments.”