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Seeking shelter from the storm in infrastructure and utilities assets

Khairani Afifi Noordin
Khairani Afifi Noordin • 7 min read
Seeking shelter from the storm in infrastructure and utilities assets
ClearBridge Investments favours regulated contract utilities companies, such as UK’s National Grid, which generally have monopoly or oligopoly type assets with low demand volatility / Photo: Bloomberg
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A mid high volatility in the equity markets, infrastructure and utility assets continue to perform well — supported by stable cash flows, growing dividends, essential services nature as well as their abilities to pass through inflation. The potential of investing in the asset class is brought to light especially as the energy crisis worsens in certain parts around the world.

ClearBridge Investments managing director and head of infrastructure business development Matt Bushby says there are some tailwinds and themes driving strong performance for funds investing in infrastructure and utilities assets. This includes post-Covid mobility restrictions as well as attractively priced assets in listed markets for private infrastructure capital.

“Infrastructure is not just about income and inflation protection, it should offer an attractive total return,” says Bushby, adding that the firm’s infrastructure fund has been able to generate a yield of 5–5.5% a year, along with capital growth over the past 12 years.

Strong appetite on the part of investors is behind the growth — specifically, some US$300 billion ($421.4 billion) in “dry powder” in the private market space as at the end of last year, looking to be deployed. There have been cases where private infrastructure managers are raising new funds worth up to US$20 billion. “There’s a lot of money on the sidelines, looking for assets in a small investment universe given the monopoly and oligopoly nature of the assets,” says Bushby.

This dry powder of capital eventually makes its way to the listed markets, which leads to a number of companies or assets to be sold at large premiums to where they are currently trading, explains Bushby.

For instance, at the height of the Covid-19 pandemic, ClearBridge managed to buy Sydney Airport shares at the mid A$5 range as the share price tumbled from as high as A$9 due to the lack of flights. In early November 2021, Sydney Airport agreed to sell itself for A$8.75 ($8.30) per share to a consortium led by IFM Investors. Aside from the airport, there are also two other companies in the firm’s fund that were privatised last year — energy delivery service provider AusNet Services and investment fund Spark Infrastructure.

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“We think the private to public capital deployment is very powerful for the share price. We go into companies after identifying the catalysts that will drive it — if we are right and those catalysts play out, the share price moves up towards our target price. If we are wrong, there’s a chance that private capital can come in and start targeting these assets, as it is seen as undervalued,” says Bushby.

5G and decarbonisation

The 5G evolution is another key driver of funds investing in infrastructure and utilities, on the back of continued demand for data. As more data is being used, there is a larger need for telcos to put up more equipment on telecommunication towers and spend on long-term, inflation-adjusted leases. ClearBridge owns a US-based REIT, Crown Castle International, which owns over 40,000 telco towers in the US.

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The last and biggest driver is decarbonisation — as there is no other sector that is at the forefront of meeting net zero emission policy goals than infrastructure, says Bushby. He claims that all sectors in infrastructure have a role to play in the fundamental reshaping of how society generates and uses electricity.

According to the International Energy Agency, annual clean energy investment worldwide will need to more than triple by 2030 to around US$4 trillion to reach net zero emissions by 2050. “A majority of these investments is in renewable energy, and we have such companies in our portfolio. We have also got the large scale utilities which are deploying renewable energy as part of a generation mix,” says Bushby.

As investments in electric vehicle (EVs) companies become increasingly popular, ClearBridge goes beyond by investing in companies that make EVs, to those that provide the infrastructure to charge the vehicles.

There are also a lot of investments needed in order to cope with the changing load and draw on the energy network and how society uses electricity in the future, says Bushby. “The companies’ growth in asset base translates to a growing cash flow profile, EPS growth and ultimately dividends in total shareholder return. Ten years ago, a fast-growing US utility was growing its assets at about 4% to 5% per annum — today, it is about 8% to 10% per annum, so it’s a step change in the investment required and that’s going to be here for decades,” he adds.

“There’s a huge investment pathway and it cuts across rails, a more efficient freight transport system than trucks or ferries, as well as more efficient toll roads, among others. There’s all sorts of ways that decarbonisation and energy transition touches infrastructure assets,” says Bushby.

Opportunities in regulated energy network

ClearBridge is Franklin Templeton’s specialist investment manager, which manages the ClearBridge Global Infrastructure Income fund. The fund primarily invests in income-paying infrastructure companies, which may include those engaged in the construction, renovation, ownership, development, financing, management or operation of infrastructure assets.

For more stories about where money flows, click here for Capital Section

These assets may be physical structures, networks, developments and projects that commodities and economies require to function and grow — including transportation, energy, water, and sewage-related assets.

The managers of the fund aim to offer infrastructure return via listed markets, not simply another equity return which happens to be focused on infrastructure. The fund excludes anything with direct commodity price exposure, such as logistics and energy retailers, many of which have come under stress or even gone under in the UK with the energy price spike as they could not pass on the higher costs to customers because of fixed contracts, says Bushby.

ClearBridge favours regulated contract utilities companies, which generally have monopoly or oligopoly type assets with low demand volatility. The fund’s top holdings as at June 30 are utilities companies such as Spain’s Iberdrola (5%), UK’s National Grid (4.77%), clean energy operator and developer Clearway Energy (4.70%), diversified energy company Public Service Enterprise Group (4.69%) as well as toll roads operator and developer Atlas Arteria (4.61%).

Headquartered in Bilbao, Iberdrola operates energy networks, renewables, and wholesale and retail operations predominantly across Spain, the UK, the US and Brazil. Bushby says Iberdrola recognised the potential for renewables “very early on”, having built up one of the largest wind power operators in the world with about 16GW spread across its operating markets.

“It has a clear strategy of capital deployment and investment in its core energy networks and renewables. That will over time dilute the supply side of the businesses which are a little bit more volatile, driving the asset-based growth and take the business in a direction that we really like, which is regulated energy networks and renewables,” says Bushby.

National Grid, meanwhile, is one of the largest utilities companies in the world, with around 60% of its assets based in the UK while the remaining 40% is based in the US. About 95% of the value of National Grid is in its core regulated utilities. “And that’s growing quite quickly — its asset base growth is 7% per annum which should lead to EPS growth of about 6% per annum over the medium term,” says Bushby.

Meanwhile, Clearway Energy operates contracted renewable energy assets in the US aside from owning conventional generation and thermal infrastructure assets. Bushby says Clearway’s capital deployment is going to be focused on the renewable side, with its parent company Global Infrastructure Partners having a huge renewable energy development pipeline.

Launched in 2016, the ClearBridge Global Infrastructure Income fund has provided returns of 4.83%, 10.78% and 7.01% over the 1-year, 3-years and 5-years periods on the net asset value as at Aug 31.

Over the next 12 to 24 months, Bushby expects the case for infrastructure investing is “enhanced”. This is as central banks try to squeeze inflation out of the system, there are chances of a policy misstep from a tight monetary policy that may lead to slow growth and potential for recession. Combined with geopolitical risks, the market’s forward outlook is more uncertain today than 12 months ago, he adds.

“The resilience and predictability of cash flows, dividends and that asset base growth concept which is so unique to infrastructure makes it so attractive. I think it is a very exciting time as an infrastructure investor because you’ve got these huge tailwinds combined with a bit more uncertainty in broader markets,” he concludes

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