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Infrastructure: investigating investment trends

Tomas Freyman Tomas Freyman

Renewable energy premiums increased by 92% in 2020, exceeding fossil fuels for the first time. Tomas Freyman explains how our infrastructure valuations and modelling team analysed the investment trends behind this rise.

There was a lot of change across the infrastructure sector in 2020. Our infrastructure valuations and modelling team recently teamed up with Inframation to analyse premiums that listed funds traded over their underlying reported net asset values (NAVs).

Set out below is a summary of our research.

What happened to infrastructure investment in 2020?

The first thing we wanted to know is if these trends in renewable energy, oil and gas as well as transport, indicate a relationship between investor sentiments in the listed market and private sector. From Figure 1 below, it’s clear to see that global deal count has remained steady over 2020 with continued investment into this asset class (in line with 2019) despite obvious economic challenges.

Figure 1: Global infrastructure deals. Source: Inframation 

To work this out, in collaboration with Inframation, we looked at two main factors: global listed infrastructure funds,’ and companies’ average share prices relative to their average book values per share. We did this to identify a proxy for the premium an investor is willing to pay over and above its reported NAV per share. After that, we analysed private sector deal data to understand whether the (more accessible) listed market sentiment is mirrored in the private sector and the investment trends inferred by it. The periodicity of reporting means that there are limitations to this approach, so our inferred premium to NAV is a guide for conversational purposes only. Nevertheless, it is fair to say that there are going to be some very interesting conversations! 

Figure 2, below, outlines the premium observed across a global basket of renewable energy, oil and gas and transport listed entities against the average for each in the year ended December 2020. As shown, although transport has historically produced the highest premiums, (averaging 173% over 2020), the battle between traditional oil and gas (averaging 41% over 2020) and renewable energy (averaging 47% over 2020) is becoming very tense. 

Figure 2: Listed premiums to NAV per sector. Source: S&P Capital IQ

Oil and gas...and renewable energy

The difference between premiums of oil and gas and renewable energy is becoming increasingly competitive. In fact, although transport premiums have not yet fully recovered from their 50% dip in March 2020, renewable energy and fossil fuels are in a duel to be the first to recover to previous levels. 

Late 2019 saw volatility in the market as a result of ongoing concerns over power prices which contributed to a short-lived decline in premiums that at its worst, fell 98% during March 2020. While we saw a mild dip in transactional activity in late Q1 2020, this has since picked up with a notable increase in competition for assets where capital can be deployed at scale, putting pressure on valuations. Unsurprisingly, deal volumes increased steadily throughout the year. 

Figure 3: Renewable energy deals. Source: Inframation

Since Q1 2020 we’ve observed renewable energy premiums increasing by 92% from January to December in that year, while fossil fuel premiums mostly stayed flat, at one point declining by 7%. This increase in premiums largely accounts for investors' growing focus on renewable energy as a way to build resilience into a portfolio as well as bolster environment, social and governance (ESG) credentials. This all comes from the rise in political and social pressure to move towards a 'net zero' emissions economy.

The expansion of the contract for difference (CfD) auctions to include onshore wind, and the reinstatement of the capacity market (CM), are likely contributing factors for rising renewable energy premiums, given the search for investments with an element of contracted / predictable cashflows. This positive market sentiment is echoed in the uptick of transactional activity throughout the year (illustrated above).  

In this context, renewable energy assets and energy transition assets will likely continue drawing attention as the drive for ESG picks up momentum, remaining one of the biggest proponents of rising premiums and deal volumes going forward.

Oil and gas premiums had a fairly tumultuous time last year. Although they were more or less steady in 2019, they took a nose-dive in February 2020 during the Saudi Arabia - Russia price war. The Organization of the Petroleum Exporting Countries (OPEC) announced that oil consumption had dropped to its lowest level since 2011 and asked Russia to lower its production; Moscow refused and triggered over-supply of the market. Saudi-Arabia retaliated by increasing its own production. 

The price war saw oil futures go into ‘super contango’ in March 2020; coinciding with the initial impact of the pandemic on global crude demand, and forcing a significant drop in premiums that caused share prices to fall below NAV for around two weeks. 

In spite of this liquified natural gas (LNG) should remain a large driver of trade. This is indicated by the fact that storage deals contributed around a third of total greenfield and brownfield infrastructure spending in Q4 2020. 

 

Figure 4: Oil and gas deals. Source: Inframation

The oil price did recover in Q4 2020, but premiums remain below their 2019 levels by around 7%. 

We consider this, in part, because our listed basket of companies does not completely capture the upturn of investment to LNG storage, but also because the modest return to industrials and cargo industry was likely overshadowed by the future impact of renewable energy and changing government policy.

Trains, planes and ports

Transport (which includes a broad cross-section of airports, ports and rail companies) was possibly the hardest-hit sub-sector in 2020 because of the global restrictions on movement. 

In March 2020 the observed transport premium fell by almost 50%, but still remained above the pre-pandemic highs of the other sectors in our research. 

Unlike renewable energy and public infrastructure, transport revenues are volatile because they are dependent on passenger pass-through. This dependence gives the sub-sector scope to capitalise on excess returns when passengers return, but also means that it suffers when they don't, unless the government intervenes.

Historically, investors have seen transport as a safe haven asset, but this, of courses, depends on utilisation of these assets. Q1 2020 saw airport premiums plummet when, for the first-time, passengers were forced to adhere to global restrictions on movement. Rail infrastructure and ports were comparatively less significantly affected: the decline in premiums was far less abrupt and the eventual recovery continued steadily, coinciding with an increase in global ecommerce.

Premiums jumped by circa 20% in the two weeks after Pfizer / BioNTech announced the success of their vaccine trials in November 2020. Coupled with continued government support packages, market sentiment is expected to continue its recovery, though we are yet to see an impact on deal activity.

 

Figure 5: Transport deals. Source: Inframation

The future of infrastructure investment

As the infrastructure sector starts to recover, it is safe to say that we have become much more aware of the relative strengths and weaknesses of its sub-sectors. Ultimately, investor sentiment appears to be returning to previous levels and the transaction momentum we saw at the end of 2020 looks to continue into 2021.

If you would like more information on this insight, contact Tomas Freyman or Jade Palmer.