Infralogic Survey: Infra market largely unfazed by inflation

Data InsightInside Infra 27 September

Infralogic Survey: Infra market largely unfazed by inflation

Skyrocketing inflation and interest rates aren’t dissuading investment activity, survey respondents say.

Inflation has had a modest impact on infrastructure, power and energy investment decisions over the past year, with more respondents to an Infralogic survey saying they are sticking to their investment strategy guns than changing their game plans due to rising prices and interest rates. 

In addition, more respondents report that the values of their infra investments have risen or remained the same over the past 12 months than those who report values have fallen. 

The results point to resilience in a market rocked by the same factors that have sent broader capital markets into a tailspin since January: Persistently high inflation prints, the Federal Reserve’s steady campaign of rate hikes to combat that inflation, supply chain disruptions and energy uncertainty sparked by Russia’s invasion of Ukraine. 

Despite the rocky investing environment, many respondents to Infralogic’s survey say their infra assets are weathering the storm. “Infrastructure remains a strong hedge to inflation, our strategy is long-term in nature and so the stage of cycle doesn’t impact the type of investments we make,” said the director of a North American open-ended fund with more than USD 1bn under management. 

“The investment strategy remains the same, it is just a matter of pricing assets appropriately to achieve the risk adjusted returns targeted,” said the vice president of a European fund manager with more than USD 1bn under management. “The infrastructure class as a whole if anything should benefit vis-à-vis in the current environment.” 

Indeed, eight of 19 respondents to Infralogic’s survey said their investments have risen in value over the past 12 months, and six said their assets have not changed in value. Only five reported declines in value. 

These responses largely align with the findings of a widely-distributed May Fitch Ratings report, which determined that inflation would have a “relatively subdued impact on credit quality, given the essential nature and inflation-linked revenue profiles of most infrastructure credits.” 

“Revenue is mainly inflation linked, so high short-term inflation has led to increases in valuations,” said a director at a European advisory shop. 

An Asia-based fund manager with more than USD 10bn under management, on the other hand, reports that inflation has negatively affected its investments in the “local private project financing market.” 

Among the respondents who reported changes in strategy as a result of inflation, many are shifting to tactics that they feel will better weather the inflationary wave. One, a European lender, is investing in “less energy consuming infrastructure,” while a high-level executive at a North American advisor said their firm’s strategy change involves “analyzing sectors least affected by inflation.”   

A top executive at a European advisory shop said their changed strategy involves “increased risk awareness on asset link to inflation and lower leverage given rising interest rates.” And a managing director at a North American fund manager said their shop has shifted to seeking “lower duration, higher coupon transactions.” 

Debt impact 

Twelve respondents reported higher rates on their organizations' debt over the past year, compared to four saying rates didn’t change. Ten say they have refinanced debt over the past 12 months in anticipation of higher rates, and 12 say they plan to refinance over the next year. 

“All debt securities have decreased in value over the past six months,” said the North American fund manager.   

Despite rising rates, debt refinancing volumes and values in 1H22 outpaced those in 1H19, according to Infralogic data:

“Refinancing transactions [have] generally maintained a steady pipeline, despite increasing rates so far,” said a Singapore-based attorney in an interview.   That may not last, however. With less than a week to go before the end of 3Q22, greenfield project financing volumes are significantly lower than the recent third quarter average:

No plans to downsize 

No respondents to the survey said they have cut jobs, or plan to, due to inflation. Indeed, legal and advisory respondents largely said that they have increased the size of their workforces in anticipation of a steady deal pipeline ahead: 

Renewables, renewables, renewables  

All respondents but one are looking at investing in renewables over the next year. A North America-based IPP manager says their firm is looking at opportunities in Renewable Natural Gas (RNG) in addition to traditional renewables categories such as wind, solar and energy storage facilities. 

Investors were also looking closely at the transportation and environment sectors, with travel demand bouncing back as more countries are moving past Covid-19: 

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