An ageing population, persistent social inequalities, and the challenges posed by man-made climate change continue to assert the need for infrastructure that is both economically and socially sustainable. Just as important to ensuring communities remain well served is financially sustainable infrastructure, with high-profile corporate failures in infrastructure sectors as diverse as social care and utilities highlighting the investment risks,\u00a0in what is widely considered a \u2018safe haven\u2019 asset class.<\/p>\n
Financially sustainable infrastructure investment starts at the very macro-level \u2013 what is infrastructure? At Newcore Capital, our consistent view has been that infrastructure is more a theme than a discrete asset class per se.<\/p>\n
This theme can then be accessed by institutional investors either via\u00a0owning shares in\u00a0an operating company or property title leased to a relevant operating company, or\u00a0through two lending instruments at equity or mortgage level. This ties in more to the emerging \u2018Total Portfolio Approach\u2019 of some institutional investors at the current time.<\/p>\n
The blurring of lines \u2013 and therefore risks \u2013 comes with the fact that many infrastructure operating companies are asset-rich, owning lots of hard assets that enable the critical services they provide. Owning a share in a company that owns lots of assets is a very different risk profile to having a stake in a company that is asset-light or owning a building leased to such a company. Investors need to ensure they are being adequately compensated for the added risk that comes from the inherent operational complexity of owning and managing a significant number of assets.<\/p>\n
Then there is the question of what fits within the theme of infrastructure. Our view is that infrastructure can be further subdivided into social and economic \u2013 what is needed to keep society and the economy functioning.<\/p>\n
Social infrastructure, which is what Newcore specialises in, may be schools, hospitals, nurseries, and care homes. Economic infrastructure may include roads, ports, and increasingly, data centres.<\/p>\n
These assets are attractive to institutional investors as, when mature,\u00a0they offer resilient income streams underpinned by contractual cashflows driven by needs-based, non-discretionary spending from consumers, corporates, and governments alike.<\/p>\n
Given the ongoing geopolitical volatility, infrastructure investments increasingly prized for their defensive characteristics, we see some managers trying to expand the definition of infrastructure to cover non-essential services as a way of attracting capital.<\/p>\n
Then there is the issue that many would consider at the crux of financial sustainability: leverage.<\/p>\n
In the pre-Covid era of \u2018cheap-and-easy\u2019 money thanks to central banks\u2019 programmes of quantitative easing, significant sums of capital gravitated toward alternative asset managers promising 2\u20133x equity returns. This was largely achieved through aggressive leverage, typically 60\u201380% loan-to-value in real estate, or, in debt multiples of 6\u20138x EBITDA for operating businesses.<\/p>\n
As we have now seen in the UK, policymakers and regulators failed to impose prudent leverage limits on societally critical assets. For key infrastructure, more appropriate leverage may have been closer to 30% than 80%. Regulators also should have stress tested for higher interest rate environments, as the UK\u00a0ultimately experienced thanks to the post-Covid inflationary wave,\u00a0and insisted on enforceable commitments to ongoing capital investment. Inflationary pressures are likely to prove persistent, driven by\u00a0deglobalisation and the cost of the climate transition.<\/p>\n
This reliance on high debt levels did more than increase volatility. In key sectors like utilities, the burden of interest and amortisation effectively constrained cash generation, leaving investors with limited capacity to fund necessary capital expenditure required for maintenance and improvements.<\/p>\n
Where investment did occur, it was often financed through additional borrowing rather than internally generated cash. Infrastructure investment needs a more balanced financial framework, with cashflow reserved for capital expenditure, working capital, environmental future-proofing, and then distributions\u00a0and interest repayment.<\/p>\n
The final layer to financially sustainable infrastructure investment is manager selection. Partnering with investment managers who behave irresponsibly only places greater pressure on public finances in the long run, which has negative consequences for all infrastructure providers \u2013 public or private.\u00a0There is a long way to go for trust between the private sector and public sector to be restored in relation to infrastructure and more prudent financial structures would go a long way to assisting with this.<\/p>\n","protected":false},"excerpt":{"rendered":"An ageing population, persistent social inequalities, and the challenges posed by man-made climate change continue to assert the…\n","protected":false},"author":2,"featured_media":30832,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[13392,5,6],"class_list":{"0":"post-30831","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-uk","8":"tag-infrastructure-investment","9":"tag-uk","10":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@UnitedKingdom\/116533600171608689","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/30831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/comments?post=30831"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/posts\/30831\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media\/30832"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/media?parent=30831"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/categories?post=30831"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/britain\/wp-json\/wp\/v2\/tags?post=30831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}