Rapidly advancing technology will provide opportunities and pose risks for infrastructure investors in 2020, according to Ancala, the independent infrastructure investment manager.

Other themes set to impact infrastructure investing in the New Year include continued rising regulatory pressures; ‘mandate drift’ among asset managers as they seek to deliver their promised returns in a low interest rate / competitive market; and greater demands placed upon investment managers to improve their ESG performance and reporting across their portfolio.

Although rapidly advancing technology will create infrastructure investment opportunities in 2020, it will also negatively affect returns from assets historically seen as “core” infrastructure, for example, the growth in hybrid, fuel-efficient and electric cars will negatively affect returns from fuel storage assets.

Spence Clunie, Managing Partner, Ancala, commented:

“Technology is both a positive and a negative factor for infrastructure investors because of its potential large-scale impacts. Energy efficiency will reduce, for example, energy usage, while renewable generation means there will be more local distribution, reducing network revenues or remaining users will need to pay more to make up for lost users.

“Investors need to be cognisant of the risk technological advances pose to their existing and future investments and factor in potential downsides should they accelerate. Having the right revenue model in place is also key. For example, the fibre network model in the 1990s went wrong because the cost of installation was not matched by what customers were willing to pay for higher speeds and services over fibre.  Fibre is not a new sector or technology.  For it to be infrastructure, existing customers should be paying a known rate over a network with monopoly features.  This applies to only a few fibre companies.”

Other themes Ancala identify as likely in 2020 include:

Rising regulatory pressures
Regulators are likely to increase their scrutiny of monopoly assets and reduce allowed returns because of continued low interest rates and political/customer pressure. The regulatory pressure on returns that we see, for example, in the UK is likely to be mirrored in other jurisdictions and the regulatory remit is likely to be expanded to include assets such as district heating.  Increased scrutiny of customer bills, particularly in the power industry, will also continue as ultimately customers pay for the move to renewable energy sources.

Mandate drift
The mandate drift seen among infrastructure investment managers is likely to continue due to lower-for-longer interest rates and increasing capital allocated to the infrastructure sector in an upward market.  This happened in 2006/07 and is happening again 12 years later.  As in 2007/08, investors should be wary of a downturn exposing which assets meet the infrastructure criteria and which don’t.

ESG under the spotlight
Reducing environmental impact, helping communities and ensuring good governance to achieve the first two objectives have always been an integral part of infrastructure investing. Momentum from investors for more responsible investing practices and for managers to better report what their portfolio is achieving on ESG is increasing.

Spence Clunie, Managing Partner, Ancala, commented:

“Ancala is heading in to 2020 with optimism on investment opportunities in our focus areas. We are also cognisant of the market environment and the risks posed from technology and a market downturn.  We are focused on sticking to our mandate and working with our investors on detailing our excellent ESG work across our portfolio.

“Ancala’s strategy is to find small to mid-market opportunities that are overlooked by other investors. That way we can still deliver our target returns from recognised infrastructure assets and should ensure our funds weather any downturn.”

 

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