EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Felipe Cifuentes, Partner, Vineyard Infrastructure.
What is your outlook for infrastructure investing?
At its core, the infrastructure thesis is value-driven, defensive and holds contractual or intrinsic inflation protection or hedges providing for a compelling investment during economic uncertainty or downturns, or in periods of inflationary pressure. In addition to its fundamental characteristics, infrastructure themes align well with global ESG initiatives, which is drawing interest from major institutional investors including state pensions, endowments, insurance, banks and corporate limited partners (LPs). The aforementioned factors produced an ideal environment for record infrastructure fundraising in 2021 during which over $136.5 billion was raised.
Record fundraising, resulting in increased competition, has compressed returns producing multiple expansion across the asset class. Funds have focused on growing platform companies deploying capital through cash-yielding capex. A pullback in public markets has driven an increasing interest in take-privates by infrastructure investors who hold over $200 billion of dry powder. Bipartisan alignment in infrastructure development has enabled sizeable public-private partnership (P3) projects including the recently announced $10 billion John F Kennedy (JFK) Airport Terminal 1, the largest P3 in U.S. history. Last, we are excited about the continued adoption of new asset classes by the market including NextGen infrastructure solutions such as carbon capture, private 5G networks, electric vehicle (EV) transit, hydropanels and hydroponic farming.
What are the greatest opportunities you see and why?
We see the greatest opportunities within the inherently fragmented lower middle market infrastructure verticals, i.e., telecommunications, transportation, power, water, and social including health care, education, and real estate. Values in this market tend to reflect inefficiencies relative to larger peers, while holding characteristics expected for the asset class including essentiality, contracted cashflows and natural competitive barriers to entry. More specifically, we see significant opportunities associated with shared digital infrastructure involving the roll out of 5G across the U.S., including towers, fiber, private networks, and edge computing. As 5G is adopted across use cases, we believe there will be significant value unlocked for the owners of associated real assets, increasing the value of tangential networks as stipulated by McGuire’s Law of Mobility and Metcalfe’s Law. Vineyard believes “last mile” 5G infrastructure will become core to the 5G economy, with an increasing number of neutral host networks providing ubiquitous and seamless connectivity to the end-user, enabling smart city solutions, industrial and enterprise internet of things (IoT), and next generation sustainability devices driving $2.7 trillion of economic activity and producing 4.6 million jobs.
One of the great things about infrastructure is that opportunities are often apparent wherever macro-level challenges or inefficiencies are observed. A lot of potential exists across transportation and logistics, including last mile transport and cold storage. Infrastructure services are heavily fragmented with only a handful of publicly traded peers, presenting a compelling landscape for platform build through roll-up acquisitions. Last, I would note the energy transition as presenting opportunities across base-load generation, distributed generation, storage, EV charging and energy efficiency.
There are a lot of exciting infrastructure companies in various stages of development providing essential solutions for our communities. It takes a village to deploy infrastructure – we like to roll up our sleeves, get in the weeds and help our partners build.
What are the greatest challenges you face and why?
Infrastructure provides strong safeguards to macroeconomic headwinds; however, regulatory inefficiencies can create systemic bottlenecks, as demonstrated by the recent Supreme Court of the United States (SCOTUS) ruling regarding the Environmental Protection Agency (EPA). Like other asset classes, rising interest rates hamper some of the upside to infrastructure investors. Investors have now priced in these increases, resulting in downward pressure on valuations. Inflation presents a challenge, particularly for infrastructure platform companies, where the rising cost of capex or labor, i.e., trucks or drivers, does not have the same direct rate protections which would be embedded into P3 or power purchase agreement (PPA) contracts, for instance. In such situations, there is typically a natural topline hedge where a relationship is observed between freight rates and inflation; nevertheless, a mismatch can negatively impact earnings.
What keeps you up at night?
We have significant problems to solve over the next ten-year period. When partisanship is unbalanced, it can become a deterrent impacting the agencies created to facilitate the responsible development or operations of our country’s infrastructure. As we consider challenges like climate change or the connectivity divide, we should take the pragmatic steps necessary to deliver clean, competitive, reliable infrastructure efficiently – the recently advanced semiconductor bill is a good precedent for this type of effective bipartisan collaboration.
Challenges often produce opportunity – and downturns often reward long-term, value-driven investors. We consider the current economic climate to be a favorable environment for building the next generation of infrastructure.
The views and opinions expressed above are of the interviewee only and do not/are not intended to reflect the views of EisnerAmper.