2020 Investment and M&A trends in the infrastructure industry [Part 1]

5 minute read  22.10.2020 Kate Koidl

This is the first of two articles discussing the outlook for investment and M&A activity in the infrastructure industry over the next 12 – 24 months.

 

Key takeouts

  • The first of two articles discussing the outlook for infrastructure investment and M&A activity over the next 12 – 24 months.
  • COVID-19 has accelerated already occurring trends in the infrastructure industry. Over the next five years we will see fundamental change across the industry.
  • We discuss the M&A trends we expect to see in the industry.

COVID-19 has accelerated already occurring trends in the infrastructure industry. Over the next five years we will see fundamental change across the industry. Changes in market characteristics are expected to continue the increasing M&A activity in the sector.

In this article we discuss:

  • increased competition for digital infrastructure assets
  • sustained focus on decarbonisation / ESG aligned opportunities
  • continued expansion of global footprints / sustained interest from international investors

Increased demand for digital infrastructure deals

Digitalisation is one of the great thematics globally that is driving innovation in infrastructure. It is fair to say in 2020 that technology now underpins trends in every industry and the intersections between industries.

The physical infrastructure of connectivity is becoming increasingly significant in a world which relies on connectivity for business continuity and societal resilience amid Government-mandated lockdowns.

Digital infrastructure is now ubiquitous - it as an essential service. Certain digital investments can probably now be classified as pure infrastructure as they are providing an essential service.

Brookfield and other investors have established their own internal tech practices to facilitate investment in the intersection between new technologies and their broader portfolios to include prop tech, and tech-enabled healthcare.

Data centres in particular have demonstrated strong secular growth trends with the consumer side containing the largest consumption of data (e.g. video and music streaming). Governments have also relied on digital connectivity to deliver essential services such as the development of the COVIDSafe tracing app.

COVID-19 has accelerated transformation in digital infrastructure with a rise in hyperscale data centres. The market is moving from operating in large markets and having one data centre in a large region to local, smaller regions. For example, markets like Peru, for example, are being considered by investors in addition to Brazil as there is a need for hyperscale to serve local markets. Certain emerging markets are jumping straight to 4G/5G.

The trend towards an increased consumption of data is expected to continue in the aftermath of the pandemic, leading to a permanent shift in consumer behaviour and sustained increased competition for established digital infrastructure assets which offer stable returns.

However, pricing the risk of digital infrastructure assets remains a challenge when compared to traditional infrastructure assets. In the face of increased demand, we should expect supply shocks in the short-term as manufacturing countries struggle to cope amid prolonged closure of factories, delays in shipments of crucial IT equipment and increased costs. Australia is considered to be well-positioned to meet increased demand for digital connectivity, given that high-income countries generally have larger capacity and more robust networks than emerging markets.

Sustained focus on decarbonisation / ESG aligned opportunities

COVID-19 is expected to catalyse the global shift from traditional approaches of investing to a focus on ESG (environmental, social and governance) investing.

The trend towards ESG investing is consistent with global efforts to decarbonise the energy sector and reduce carbon emissions, impacting many markets such as aviation. There will be more opportunities in transition fuels (primarily gas) and renewables platforms as countries look to transition away from coal. Offshore wind power also presents an increasingly attractive investment opportunity in North Asian markets.

In an Australian first, John Holland, in partnership with Plastic Police, has committed to recycling single-use plastics into safe and reliable asphalt for road surfaces. The 2020-21 Federal budget has also provided funding for $2 billion in new funding for water infrastructure and $250 million to modernise our recycling infrastructure.

The pandemic has reinforced the need to consider the "social impacts" of a project and enhance internal governance processes. For infrastructure investors, it will be interesting to see how the trend towards ESG investing will impact decisions related to greenfield and brownfield investments.

Will infrastructure investors simply develop separate KPIs for greenfield and brownfield investments (in line with their different risk profiles), or will there be a reluctance to invest in greenfield projects to the extent that such projects conflict with ESG principles?

Continued expansion of global footprints / sustained interest from international investors

Greater standardisation across markets has a tendency to lower the barriers to entry in operating across the globe, as bespoke projects with unique features have limited repeatability and, therefore, a degree of unpredictability. It is predicted that market players will expand their global footprints as scale becomes increasingly important to securing a competitive advantage.

Australia is known as one of the most competitive markets in the world for infrastructure investment. This has led many Australian-based investors, such as the superannuation funds to invest offshore to satisfy their deployment requirements. AustralianSuper, for example, has significant investments overseas including in India, the UK, Europe, the US and Canada. Brookfield is also focussed on expanding its investment portfolio in markets such as India, China, Korea and Japan.

Similarly, there has been sustained international interest in the Australian market and consolidation in the sector since 2015. It is anticipated this will continue.

The Federal Government's announcement in March 2020 that, in a COVID-19 affected economy, nearly all foreign investment in Australia will require screening and prior approval through the Foreign Investment Review Board, may impact the ability of overseas players to invest in Australian infrastructure in the short-term. There are also extended timeframes for reviewing FIRB applications (from 30 days to six months).

Although, industry stakeholders suggest that the new FIRB rules have not been a major impact on the ability of overseas investors to invest in Australian infrastructure to date.

Read more in Part two of this series


If you would like further information or to share your thoughts on the industry shifts we have identified, please reach out to one of our infrastructure M&A specialists.

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https://www.minterellison.com/articles/investment-and-ma-trends-in-the-infrastructure-industry-part-1