Private Markets Outlook 2021

The platform-building opportunity

Resistant to the most punitive effects of the COVID-19 pandemic, the fundamentals for infrastructure assets in our investment universe remain broadly unchanged. Close to USD 70 trillion of infrastructure investment will be needed over the next 15 years to support growth . What is more, infrastructure is crucial for crisis recovery.

It is likely that over the coming months the global policy response will move away from short-term support measures toward long-term, productivity-enhancing infrastructure investment. The pandemic may alter infrastructure policies, such as deprioritizing mass transit and placing greater emphasis on the densification of digital infrastructure, but, overall, infrastructure spending will prove critical to international recovery plans. Sustainability is also likely to become a more dominant theme.

Valuations have eased off their pre-COVID-19 peaks in many industries. Assets with cash flows tied to GDP (e.g. airports), assets sensitive to commodities pricing (e.g. oil price-exposed midstream assets), and “infrastructure lite” assets (e.g. services assets) have been hit hard. Meanwhile, across sectors, assets with fragile capital structures that were over-levered or very cash tight also experienced valuation contractions (e.g. oil & gas upstream assets). This adverse impact was only partially offset by expectations of prolonged low interest rates. A notable exception is digital infrastructure, where valuations have remained elevated thanks to the resiliency of the sector and strong tailwinds in digital penetration.

Within target sectors, we seek out assets with true infrastructure characteristics: hard assets and strong businesses with long-term contracted cash flows and high barriers to entry. We expect that valuations for these quality assets will likely continue to be elevated and we therefore remain committed to no “cheap buys”, even in a post-COVID-19 world. 

One structural trend that underpins our approach to the market, is the ongoing densification of digital infrastructure. COVID-19 has sharpened the focus on the utility-like characteristics of digital infrastructure, and network densification and upgrades are key to meeting fast-growing data consumption globally. We look at infrastructure for better coverage, faster speed, and for the management and storage of data. The former includes assets such as macro towers, distributed antenna systems (DAS), small cells, and transport/backhaul fiber capacity. The latter focuses on data centers. 

The sector has traded well throughout the COVID-19 crisis. Mature data center platforms have seen average EV/EBITDA multiples of approximately 20 times in recent transactions. This is reflective of the stickiness and low credit risk of customers and the embedded development optionality. Considering the elevated valuations for operational assets, we mostly look at building core and/or development data center opportunities in the Asia-Pacific region, where the availability of such projects is higher than in mature markets.