Episode Transcript
[00:00:03] Lawrence Slade: Hi, my name is Lawrence Slade and I am the Chief Executive of the Global Infrastructure Investors Association. Today I'm here with Jason Clatworthy who's Managing Director at Alvarez & Marsal Global Transaction Tax practice. Also with Jay Moody, who's Managing Director at Alvarez & Marsal Global Transaction Advisory practice. Gents, thank you very much for joining me. I think we're going to have a fantastic discussion about the trends around infrastructure investing today.
[00:00:33] Jason Clatworthy: Laurence, thanks for the introductions. Pleasure to join you on the podcast.
[00:00:36] Jay moody: It's nice to be with you for another pulse survey, Lawrence.
[00:00:40] Lawrence: Thanks very much both. We're here to discuss the results of our latest survey. I have to say the pulse survey has become something that as far as I'm concerned anyway, and it is absolutely essential for whenever we're meeting policymakers or stakeholders in the industry because it just gives such a wonderful guide to the temperature check of investor sentiments in the sector and where the emerging trends are. Perhaps I can kick off with a question to both of you, Jason and Jay, we are seeing billions effectively record levels of capital being raised by investors. Jason, perhaps if I come to you first, what are you seeing as you help clients establish new vehicles?
[00:01:22] Jason: Thank you, Lawrence. You're absolutely right. The market remains very strong across both Europe, the US, and globally. Interestingly, from a fundraising perspective, I think recent figures showed that at the end of Q1 2022, there was more than 60 billion raised, which is doubled the same time last year. What's driving that is we are seeing more and more larger funds than ever being raised across the globe. We're seeing that in both the equity and the credit space and they're all very successfully being subscribed and launched.
One development we are noting is the emergence again of what are being called the core funds, which are tending to be the larger of these funds we're seeing being raised. It feels like it's bringing the sector full circle after 20 years where we've heard talk of a core plus operational infrastructure and going back to its heritage of core infrastructure assets after around a 20-year cycle of the market. We're also noting a very discreet and distinct move into very sector-specific funds, particularly targeting renewables, obviously driving towards the net-zero agenda, digital and broader telecoms.
Increasingly, we're seeing as I noted earlier, stratification between the core, the mid-market, and the larger deals, therefore, delivering plenty of dry powder driving the increased deal flow, and onsite very good appetites from the lenders to keep supporting this sector.
[00:02:51] Jay: The America's respondents during the last two surveys have indicated less favorable debt markets. It's not by any means a negative score. It's just a two on a scale of negative five to positive five, but lower than prior scores. Regardless, the score declined for the first time in the last four surveys. The decline is likely driven by an expectation of higher interest rates. In the US there's a full expectation that short-term rates will be increasing due to fed lightning, which will likely impact rates for all tenures of debt.
Despite the decline in the respondent's view of infrastructure, debt market attractiveness, the fundraising environment in the US, similar to what Jason commented for Europe for Q2 2022 still remains robust and close to all-time high as achieved last year.
[00:03:38] Lawrence: Thank you for that both Jason and Jay. Moving on a little bit to look at some of the trending sectors and regions. I think it's fair to say that we've seen deal activity plateau to an extent compared to the record highs at the time of our last pulse survey. As you've just been commenting around the record levels of fundraising to put it succinctly if you like, there's still a heck of a lot of capital out there to be deployed and physical activity still remains buoyant. I think listeners will be really interested to get your views as to the trends you're seeing and how they break out into different sectors and regions. Perhaps Jay can come to you first.
[00:04:20] Jay: Sure, Lawrence. For the America's, all regions received a positive attractiveness score for the second survey in a row. This is a large improvement from prior ratings for Latin America, including both Mexico and Brazil. The US and Canada have consistently received high scores, but this is a new development for all of Latin America. Mexico and Brazil are becoming more attractive due to several factors. For Brazil, despite the political environment being somewhat uncertain there, there are three factors we see.
First, there's a strong need for food products, which requires infrastructure investments, notably logistics-related assets to improve the efficiency of the agriculture sector chain. Ports, roads, rail, are all heavily in demand. Second, energy transition into renewables has been heavily embraced by Brazil. The third factor, broader global demand is strong for commodities like copper, steel, and oil and gas-related products. These products are critical to Brazil's economy and will be a tailwind for the country very assuming the higher commodity price environment we see currently continues.
For Mexico, the recently proposed energy reform bill did not pass, which was favorable to the market. Overall, investors and stakeholders recognize a huge need for investment in Mexico's infrastructure in the future. Switching over to sectors, the sectors of focus in the US and throughout the Americas, it's generally more the same. The sectors that are still of the most interest to investors are sustainable generation from solar, wind, and hydro assets. Meanwhile, midstream infrastructure and airports remain the only two sub-sectors of infrastructure with a negative outlook from investors over the next 12 months. Jason, what are you seeing in Europe?
[00:06:02] Jason: Thank Jay. Very interesting setup in America. We're not seeing a massive difference in Europe interestingly. What we are seeing is across the regions, strong appetite since the last survey with particular emphasis in both the Nordics and increasingly the UK needs to be back in favor. We're seeing a big sentiment towards regulated water again in the UK. I think mainly driven by the settling down now of the CMA investigation into the regulated rates of return. Also, I think that slight concern a few years ago of maybe a labor government looking to privatize the assets.
It's become a very interesting sector again for particularly these core funds that I alluded to earlier. Mainly across the rest of Europe, still really positive sentiment and that from our last survey, but not surprisingly a big drop off in Eastern Europe and the Eastern block countries where sentiment from respondents was very negative. On a sectoral level, generally, all asset classes are looking attractive and it pretty much as I started, mirrors what's going on in the Americas very strong positive shift towards sustainable generation, renewable solar.
Interestingly for me, another return to transport and logistics assets, very strong over the last four water other than airports. We're seeing a lot of interest in rail transport, car park roads and motorway service stations, et cetera. Interestingly, waste has taken up a big tick in Europe over the last quarter. Notwithstanding that, the clear emphasis around the net-zero targets is driving a lot of appetite into the sustainable generation sector in Europe.
[00:07:42] Lawrence: Well, thanks for that, gentlemen. I think that very clearly provides us a neat segue into the next part of our discussion. I'd like to bring in any way, which is around ESG. We're seeing lots of activity. We are seeing an increasing range if you like, maybe in the sectors that we are looking at. Certainly, from our perspective and the conversations we have with investors and with stakeholders across all of the key markets, we're really seeing the sustainability agenda becoming much more of a priority. I wonder what developments you're seeing with your advisory work, particularly around commitments for net-zero. Jason, perhaps coming to you first.
[00:08:22] Jason: Lawrence, thanks for that. My experience in Europe is absolutely mirroring what you're echoing there. An absolute priority now for our investors as it probably was in our clients around this ESG net-zero agenda. What we have noticed, what we've seen is an increased resourcing level within these investors to have a team particularly focused on ESG and to implement a strategy towards net-zero. I think interestingly from my perspective, that lens is both an internal one from their own practices, their own businesses, and what more they can do.
That's not just around the net-zero agenda, it's across the entire sustainability impact agenda with diversity, et cetera. Also, as you say, driving and having a really good look at the assets, they are already invested in what could be done to improve the footprint of those assets. Increasingly alongside our traditional financial and tax support, we provide clients the ESG element of what we do know on transactions is growing at a rapid rate of knots. Almost without exception, it's part of the work we do now in supporting our clients in evaluating their assets both ones they currently own and are looking to own.
I think it's a big drive within the European client base that we have with increasingly dedicated teams within those investors to deliver on the net-zero commitments.
[00:09:48] Lawrence: Jay, how are you seeing things from an America's perspective?
[00:09:51] Jay: Yes, Lawrence, it's very similar to what Jason described for Europe. I won't rehash everything that he said but I will say that there are definitely opportunities across all sustainable sub-sectors for renewable generation all the way to EV charging and batteries. I was just at a conference earlier this week. There was even a good bit of chatter about clean hydrogen from renewables and nuclear generation. Developing and deploying clean hydrogen can be a critical part of the path in a net-zero carbon future and combating climate change. We've seen the sustainable other category rise every period we have done the survey with GIIA members.
Currently, an increasing proportion of investors are willing to accept increased development and green-field risk as well in an effort to increase returns due to auction processes for great assets, pushing asset prices higher, and the forecast IRRs to lower levels.
[00:10:41] Laurence: Thanks for those comments both of you. I think I fully echo what you've been saying around ESG and Jay, your mention of hydrogen, we are seeing certainly here in the UK and across in Europe, tremendous demand for looking at how policies and regulatory regimes are going to support the investment in that side of things. As you say, out to EVs, et cetera. I think also from a government perspective, whomever we are talking to even over with the National Governance Association, we are seeing this drive towards sustainability and more transparency around funds and where a future investment is going.
I think it'll be really interesting to see how the pulse survey responses develop over the next 18, 24 months. I think we've had a really good conversation here. It's always interesting on these podcasts, how quickly we can move from fundraising through to trends, through to regions, and to topics like ESG. I hope our listeners have been able to follow that. Thank you so much to Jason, and Jay for making the time to join me, to discuss the pulse survey itself. Thank you of course to our listeners. I really hope you found this insightful. If you would like to look at the whole survey, you can find the Spring Pulse Survey on the GIIA website and also on Alvarez & Marsal's website.
If it raises any questions that you'd like to talk through in further detail, then, of course, please do not hesitate to reach out to us all. Thank you very much.
