Infrastructure investment perspectives during a pandemic
Infrastructure investors in ports, railways, airports and toll roads share their perspectives on how COVID-19 has affected the infrastructure asset class.
- Pandemic impacts on infrastructure investments differ by sector
- Freight assets are withstanding the economic shock
- Deal flow and transactional processes have slowed considerably
- Investors stand behind their assets
- Governments must work with stakeholders to support key infrastructure facilities
Transportation infrastructure has always been an attractive asset class. It provides pension funds and other investors with long-term, resilient and often inflation-indexed returns.
However, the effects of COVID-19 have been keenly felt across all sectors of the economy. Transportation infrastructure did not escape the pandemic, but some assets have weathered it better than others.
Four themes emerged.
Assets key to freight supply chains or that have limited demand risk are standing tall
Though hurt by the pandemic, the trade of goods and commodities persists. Transportation assets that serve as key links in global freight supply chains, such as container terminals and facilities supporting truck traffic, are faring reasonably well.
Conversely, assets with significant exposure to passenger demand and associated revenue risk have been hit the hardest.
Not surprisingly, airports have suffered the most, as demand for air travel has practically evaporated. In Canada, for instance, passenger traffic has declined more than 95 per cent since early March.
Toll road revenues have also dropped, as many would-be commuters have been working from home. Note that revenues in some jurisdictions are trending towards pre-COVID levels as economies reopen.
From a public interest standpoint, governments must recognize the strategic importance of these facilities and work with operators and investors to support their recovery over the medium to long term. For instance, governments can identify important facilities at risk of permanent closure and proactively work with its stakeholders to provide bridge loans or other financing to help them recover.
These measures can play an important role in economic recovery as pandemic-related restrictions are progressively lifted.
Investments that best weathered the pandemic have been infrastructure assets and projects with limited demand risk. These include many public-private partnership assets receiving availability payments. We have not heard any suggestions that governments will look to renegotiate availability payment contracts.
Capital raising, financing and deal flow have slowed to a crawl
The market for capital at the project level has almost entirely dried up in recent months.
According to the investors we spoke to, fund-level capital raising has been slow. Active transaction processes are few and far between as investors keep an eye on their own assets. The limited ability to travel for site visits and management meetings due to COVID-related restrictions contribute to this slowdown, too.
The same scenario is playing out in other related sectors, including advisory and due diligence mandates.
Nevertheless, investors have been active in helping their portfolio companies access short-term liquidity and negotiate waivers and extensions for debt servicing requirements.
Yet, investors have not sold the infrastructure assets suffering the most from the pandemic. Indeed, such assets are likely subject to low valuations at present and may well achieve robust returns once the global economy stabilizes.
Major infrastructure projects are well-capitalized, with stakeholders standing behind their assets
Large cap investors with deep pockets and strong access to capital are standing behind their assets and supporting them through this difficult period. Generally, major infrastructure projects are viewed to be well-capitalized. This may explain why we have not yet seen many high-profile distressed assets up for sale or financing.
That being said, certain aviation assets and toll roads with heavy passenger exposure may well eventually become takeover targets in the coming months and years if liquidity becomes a problem.
Such distressed assets would likely require significant financial and operational restructuring. This could be an opportunity for investors with capital to deploy.
Lastly, there is appetite in the infrastructure investment community to speak with one voice to governments and authorities
Unity during times like these is paramount, and this is no different in the infrastructure space.
Infrastructure is essential to our interconnected world, and private capital is a crucial enabler. It is in society’s best interest for prevalent large cap investors with significant infrastructure holdings to work together in fostering dialogue and developing recovery plans with governments and authorities.
This may also present a new role for infrastructure banks to help shoulder the risk for continued operations, maintenance and capitalization of infrastructure.
In any case, the consensus among the investors we spoke to is that governments will not simply allow critical assets to go out of business and fall into disrepair.
Our own view is that the economic consequences of letting critical transportation assets fail would be unacceptably high. This would stall economic recovery as well.
How governments intend to support these assets is unclear, given that authorities are still addressing the first order problems caused by the pandemic.
About the authors
- Marc-André Roy is CPCS’s Co-Managing Partner
- Daniel DiFilippo is Senior Consultant in CPCS’s Canadian Advisory team
CPCS is a management consulting firm that advises infrastructure leaders on challenges specific to transportation, power and public-private partnerships.