This article is sponsored by Ardian.
Transport infrastructure assets suffered particularly badly in the covid-19 pandemic, when billions of people around the world simply couldn’t use toll roads and airports. This not only interrupted income streams but disrupted long-term development plans, with uncertainty hanging over how these capex-intensive assets would fit into the future.
However, with transaction volumes now returning to health, opportunities are again emerging for investors familiar with the space. Ardian’s co-head of infrastructure Europe, Juan Angoitia, and managing director, infrastructure – transport, Alexis Ballif, consider how sustainability KPIs are increasingly dictating investment decisions.
There has been a resurgence in transaction activity around transport infrastructure. What is driving this and where are you seeing the most activity?
Alexis Ballif: What we found was that in the years before covid, the volume of transactions in the property sector was around $30 billion per year on average. Today, we are not there yet but it is definitely picking up.
Transactions that were put on hold because of covid are now back on the market. This is true across all subsectors but is most striking in airports. When you look at the pipeline for the next 12 months, many airports, notably in the UK, will be up for sale.
The first trigger to this resurgence is the return of traffic. It has been back sooner for roads but has now returned for airports, and I would say stronger than many had expected.
Second, investors had to fix the capital structure of these assets. During covid these had been burning cash to stay afloat, so leverage increased. Now that traffic is back, those assets are turning cash-positive again and are able to deleverage. And a lot of these companies, particularly those operating in the air travel space, have been through refinancing before coming to the market.
When looking at a transport infrastructure asset, what are the most important KPIs to focus on?
Juan Angoitia: For us, transportation is about diversification. We invest across transport, energy and telecoms, and the more we diversify the better we can mitigate volatility. In terms of KPIs, when investing in transportation, we are looking for the characteristics of infrastructure – long-term investments, revenues linked to inflation, barriers to entry, visibility of cashflows and downside protection.
Capital structure is also critical; these types of investment have very high EBITDA margins and are capital intensive by their nature. You have to play this cautiously and we like to be conservative on leverage.
The other point that is important in relation to transport infrastructure is that you must have a local view. Above all the data there is a common-sense principle which is to ask whether a road/airport/railway makes sense or not.
We have seen many toll roads in corridors but with no flow of traffic. Yet they were still built! So, being on the ground and understanding the local dynamics makes a big difference in avoiding investing in the wrong projects.
“These types of investment have very high EBITDA margins and are capital intensive by their nature. You have to play this cautiously”
Juan Angoitia
AB: If we were to look at new KPIs, one would be the composition of traffic. Working patterns have been transformed in some sectors by the pandemic, which means the composition of commuting traffic for roads is even more relevant today than it used to be a few years ago.
Another new KPI for transport infrastructure is the emissions of that asset. When we invest in a transport asset, we are factoring in the corresponding emissions of traffic flow, and this is something we have to consider in our investment assessment.
Now you have to address these emissions, have a plan around them and know whether your investment is in line with a net-zero trajectory, even if this can be challenging.
JA: Before, visibility of emissions was a nice to have, but now it is crucial. It has almost become like having a licence to operate.
If you look at transportation assets, ESG was always on the minds of investors because when these assets were built, they always had to clear natural land to make way. People had to understand what these risks could pose to their investments and that is something we have always looked at.
However, it has now evolved from simply being about risk mitigation to reducing the emissions and being part of the energy transition/decarbonisation trend. And it is not just about measuring and reducing the Scope 3 emissions of an asset, which is challenging enough; we also have to consider the social impacts, such as how an airport, a toll road or a railway will be part of and benefit the surrounding community.
What are the major challenges facing transport infrastructure investment this year? For instance, how is the prospect of rate cuts being taken into consideration?
AB: Understanding the ESG impacts of an asset is now the biggest challenge. Now when you invest in an airport you know that if you don’t address net zero then the regulatory risk is likely to be greater.
With rate cuts, because most of the assets were regularly refinancing before covid when interest rates were still low, these will have long-term debt facilities in place. This gives us a cautious approach to leverage. On average, the debt on our portfolio has a seven-year maturity and hedged for more than 75 percent of the debt. So, our portfolio is very safe vis-à-vis new financing conditions.
If there are cuts to interest rates in the near future, overall, debt financing will still remain more costly than it used to be – and the cost of development projects will be higher.
“Understanding the ESG impacts of an asset is now the biggest challenge”
Alexis Ballif
What does an asset manager bring to a company beyond capital?
JA: In our case, we are hands-on investors. We are a team of 70 working in infrastructure, from a range of backgrounds, and over 30 partners in the wider business helping us. The latter can often work in other areas of infrastructure and different asset classes entirely. Collectively, we have a lot of knowledge.
We bring guidance on how to grow and manage different assets. We know our role and understand we are not managers, just the shareholders, but we like to get involved in these decisions.
For instance, when it comes to expansion of a toll road, we can share valuable insights as we are shareholders in ASTM – the second-largest toll road company in the world. We know how these markets perform and can leverage this expertise. With ASTM in particular, the structure was complex, so we made some changes and delisted the company to simplify it before supporting strategic acquisitions in major markets like Brazil or the US.
The same has been done with our airport investments in Italy, where we have brought on board the management team and helped them with crucial decisions. Here, we are leveraging insights from when we were shareholders of London Luton Airport, where we were able to increase capacity, fill that extra capacity and strengthen the management team to execute the plan. We are active, we have an industrial mindset.
How can decarbonisation be advanced at an asset level?
AB: In our view, decarbonisation is a key objective to achieve and as shareholders we want to ensure this gets the appropriate level of resources to tackle properly. As active shareholders we discuss and build strategies together with the management team.
We did this with management teams of airports throughout Italy, discussing with them the best way to meet the net zero 2050 challenge. One of the bits of feedback from them was the lack of existing tools they could use to measure Scope 3 emissions.
Fortunately, we have data scientists in our investment team who were able to help. Through months of collaboration, they were able to develop a platform to measure Scope 3 emissions called Ardian AirCarbon. This was specifically designed for these Italian airports but has now been expanded beyond our portfolio companies and launched in the wider market.
This is extremely powerful as a first step to help measure emissions and better inform decisions, running scenarios to see how emissions could be reduced. Management teams already knew reducing emissions would have to be around flightpaths.
With Ardian AirCarbon, these airports have been able to optimise flightpaths and reduce up to 30 percent in emissions associated with take-off and landing. This is massive.