Delivering Infrastructure Differently.

In a macro-economic and political environment marked by profound uncertainty, Spence Clunie, Ancala’s Managing Partner, shares insights on Ancala’s tailored approach to downside protection, how it manages risk and unlocks value.

If there’s one thing investors aren’t supposed to enjoy, it’s volatility.

It’s been hard to avoid in recent times and the short-term outlook doesn’t offer much comfort either.

However, this market volatility has highlighted the strength of a key part of what makes our investment strategy different and so effective: our approach to downside protection.

It’s something that we factor into every stage of our investment process. It’s also something that – together with our focus on value creation – has helped us deliver our target returns and cash yield for investors through recent headwinds.

Here’s how it works, and why I believe it’s going to continue to perform against future challenges.

Prioritising downside protection at every stage of the investment cycle

Our focus on downside protection starts well before any investment is made and is directly supported by the entrepreneurial and collaborative approach that underpins everything we do.

We prioritise sectors and assets that exhibit traditional infrastructure characteristics, looking for overlooked opportunities that are asset-backed, pay distributions, and provide inflation-linked revenues under long-term relationships. These inherently enable us to manage risks and mitigate the impact of geopolitical or economic changes.

We also look for assets that will continue to be attractive and hold their infrastructure characteristics in the medium- to long-term. This helps protect capital and provides greater certainty for our investors.

Once we’ve identified a potential investment, we are meticulous in our underwriting and risk consideration – mapping out what we can control and ensuring that we have the right measures in place to protect us from the risks we cannot.

How we approach an investment then helps to derisk further. One part of this is paying the right price, supported by our focus on bilateral origination – approaching the owners of assets directly to understand how we can help them achieve their full potential. Approximately 80% of our investments to date have been made on a bilateral basis.

When we proceed with an investment, we typically do so with a low level of leverage – currently, an average of 31% across our portfolio1. This minimises our exposure to fluctuating interest rates and gives us more flexibility to improve and grow businesses.

Using our industrial and financial experience to mitigate risk

Our work to derisk continues as soon as we invest.

We combine the expertise of our investment and asset management teams including our industry partners – former CEOs from within the sectors we work in, and the chairs of major infrastructure organisations – to actively manage assets to minimise exposure to volatility.

In the mid-market, there’s significant opportunity to deliver comprehensive improvements to infrastructure businesses – including when it comes to enhancing downside protection.

For example, across our portfolio we are helping companies to decarbonise their operations by installing renewable energy production on site. This reduces input costs and exposure to the volatility of the energy market. It’s a good example of ‘controlling the controllables’, and something you can read more about specifically with how we helped decarbonise Dragon LNG, here.

The road ahead

The economic conditions of the past four years have been a reminder to investors and businesses of why downside protection is so important. Its value will continue to be shown in the months ahead as uncertainty persists.

There seems to be little prospect of a resolution any time soon to the tensions in Europe, the Middle East, Africa and beyond, exacerbating energy and wider market instability. And while interest rates may have peaked in much of the western world, they remain high and the pace – and extent – of any downward trajectory is far from certain. Against this backdrop, the OECD is forecasting that global inflation will run at 3.4% during 2025, outpacing global GDP growth of 3.2%2.

All of these factors will have a myriad of knock-on effects on infrastructure assets; all of which need to be managed.

Building effective downside protection against these will take hard work and skill at every stage of the investment lifecycle. Our funds continue to outperform through volatile market conditions – a result of how we approach downside protection.

We’re confident our focus on downside protection will help us continue to deliver for all of our stakeholders, no matter the economic environment we face.

Interested to find out more? Register for a discussion with Ancala about downside protection, here.

 

References

1 – Data as of March 2024

2 – OECD Economic Outlook May 2024

 

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