Investors have increased their exposure to infrastructure assets in recent years, in part, for their relative stability and steady cash flows, especially at times of volatility and uncertainty. What does 2020 hold for this asset class, against an unprecedented backdrop of slowing economic growth and market turmoil? We spoke with Tim Formuziewich, IMCO’s Managing Director of Infrastructure, to get his perspective.
How are you thinking about infrastructure as the year unfolds? Where do you see the opportunities for this asset class?
There’s no question that investor appetite for infrastructure remains strong. We’ve got up to a $10-billion allocation to this asset class and we are well underway in deploying this capital. We’re being prudent, methodical and responsible, and are doing this both directly and through funds.
Our strategy is global, and we’re seeing a lot of activity across the asset class. When assets are fully valued, there are many willing sellers and that has been the case for the last two years, especially in North America and Europe. There are significant amounts of capital chasing deals in those markets, which has driven this trend.
What we’re trying to do right now is two-fold. First, we’ve been looking at our existing portfolio to determine which assets we’d like to keep and own more of, and which ones we’d like to sell. And then second, we’re looking at assets that offer clients improved diversification, opportunities that are strategic in nature for IMCO and, given the current market environment, value-oriented opportunities.
Wherever you look in the private markets, there’s talk of significant amounts of “dry powder” capital – money that large institutions are waiting to deploy. Does that make infrastructure investing more challenging for IMCO?
There certainly is a lot of dry powder in the infrastructure world, but generally I would describe most of the market as appropriately pricing risk. It’s forcing everyone to be more disciplined, and that’s really where we excel. We believe there’s still good value to be found among the largest transactions in the world, as well as select regions in the world such as Latin America, pockets of Europe and a number of emerging markets. The pandemic has created challenges for some sectors that ultimately translates into potential investment opportunities at valuations that were not available a few months ago.
What’s guiding your investment decisions in this sort of environment? Are there sectors or industries you’re focused on?
We are trying to deliver absolute returns to our clients and offer portfolio diversity in doing so. Our portfolio view does not change from a fully valued environment to a dislocated environment.
In terms of sectors, we’ve been generally cautious on transportation assets over the last year, as we have been on the back end of a long bull run. We think other private investors view the world in a similar way. This cooling off could end up translating into some interesting transport opportunities in the next year or two.
There is also significant opportunity in what I’d call defensive or neutral transactions. This includes technology – fibre buildouts, data centres, cell towers and so on. We believe that investment is going to happen regardless of whether or not the economy is going to grow or flatten over the next couple of years.
We’re also looking closely at renewable energy. We believe the transition to renewables or low-carbon energy will be much faster than what some anticipate.
IMCO has a long-term investment horizon. When you look ahead five or 10 years out, what do you think will be your areas of focus thematically speaking?
I think again that the change in the power and energy industry will be a big theme. My view is that any systemic alpha in renewable development is gone, with the exception of select opportunities in developed markets and certain emerging markets. At the same time, the influx of intermittent renewable energy assets such as wind and solar have created system stability challenges that regulators have begun to address. We’re spending a lot of time studying what an energy business will have to look like to be successful in five or 10 years.
Next is the unfolding telecommunications buildout. In our view, the fiber buildout in particular is happening now in scale and potentially will only be required once. In 10 years, we’d like to look back and see a portfolio that has thoughtfully and constructively invested in the space.
And the third theme would be greater exposure to greenfield development. The current dislocation will not last and when markets revalue, the option to invest at cost as opposed to multiples of cash flow would be extremely valuable to our clients.