Infrastructure Outlook

Lessons learned for 2023

Paving the way for 2023 (and beyond)

UBS Asset Management

Creating value in uncertain times
The infrastructure sector remains resilient despite the market turmoil in 2022.
Secular trends such as digitalization and decarbonization will continue to drive the
need for new investments. However, macro conditions have worsened
significantly. Investors can no longer count on cheap credit to boost investment
returns. Looking ahead, more reflection and rigor are needed in their investment
and asset management strategies to deliver positive outcomes.

Time for investors to prove their mettle

Figure 1: Listed infrastructure revenues by sector

(Indexed to 2019, %)

160

140

120

100

80
2022 has been an eventful year for investors, to say the least.
Issues such as high inflation, rising interest rates, geopolitical 60
tension, political uncertainty and extreme weather events have
pushed the pandemic into the rearview mirror. 40
2019 2020 2021 2022E 2023E 2024E

Infrastructure assets have performed relatively well in 2022. Airports Toll roads
Based on analyst forecasts for listed infrastructure revenues, Rail and other transport Telecom infrastructure
the outlook is still relatively strong across the board, with Utilities Oil & gas
previously underperforming industries such as toll roads and Renewables
airports finally seeing strong recovery (see Figure 1).
Sources: Bloomberg, November 2022

Page 2 of 14
Oil & gas infrastructure has so far been an outlier, with robust Performance data between 2005 and 2021 backs this up, as
performance due to the global energy crisis. Its sustainability is private infrastructure outperformed public markets when we
questionable though, as crude oil price is already down 30% saw above-average inflation (see Figure 3). This
since its peak back in March. Future markets also suggest that outperformance is more evident when high inflation was
commodity prices will also moderate in 2023 and 2024 (see combined with low GDP growth. 2023 will likely further
Figure 2) with increased supply growth and demand reinforce this, as private markets have outperformed public
destruction. markets so far in the first half.

Figure 2: Commodity price futures, indexed price Figure 3: Private infrastructure performance under
(Indexed to 2019) different GDP/CPI scenarios 2005-2021 (%)

1000 20
Private infrastructure outperforms
when inflation is high
15
800

10
600
5

400
0

200 -5

0 -10
2019 2020 2021 2022E 2023E 2024E 2025E High GDP Low GDP High GDP Low GDP
Growth Growth Growth Growth

UK Electricity Asia LNG High Inflation Low Inflation

NYC Electricity US Gas
Brent Oil EU Carbon Unlisted infrastructure (CA) MSCI World

Sources: Bloomberg, November 2022 Sources: Cambridge Associates; Bloomberg; MSCI; OECD, April 2022
Notes: Data based on quarterly YoY data; unlisted infrastructure based on
Cambridge Associates data; GDP and CPI data based on OECD countries;
threshold for high vs. low GDP and CPI are both ~2% (based on median
Inflation has put private infrastructure in the spotlight, as the quarterly data of observation period). Past performance is not a guarantee
asset class has a reputation of being resilient in inflationary for future results.
environments, given its strong pricing power and its ability to
pass higher costs to customers. Its defensive nature also makes On fundraising, infrastructure capital raised already reached a
it relatively attractive compared to other asset classes during record by September 2022, although the number of funds has
uncertain times, especially when investors are looking for safe fallen significantly, implying a high concentration of mega
havens. funds (See Figure 4). Infrastructure dry powder now stands at
a record USD 330 billion, according to Preqin.

Page 3 of 14
Figure 4: Infrastructure fundraising trend Finally, infrastructure investors have not increased their hurdle
(USD billions) rates despite rising financing costs. Deal valuations remain
stable even with the underperformance of public markets.
160 180
Private infrastructure benchmarks such as MSCI and Burgiss
150 remain positive in 1H22, while anecdotally, we have also not
120 heard any reports of widespread write-downs.
120

80 90 This is a controversial topic, which we will discuss in more

detail later. But one argument supporting the resiliency of
60 infrastructure is that long-term inflation expectations have
40 remained relatively stable since 2019 in key markets1 (see
30
Figure 6).
0 0
(Jan-Oct)
YTD
2015

2018
2013

2014

2016

2017

2019

2020

2021

Figure 6: 5-year, 5-year forward breakeven inflation

20222022

Capital raised (USD bn) - LHS

5.0
No. of funds - RHS

Source: Preqin, October 2022 4.0

Inflationary pressures have pushed central banks around the 3.0

world into an aggressive monetary tightening cycle. 10-year
government bond yields have increased by 200-300bps 2.0
from January until November 2022 (see Figure 5). Since
infrastructure investments tend to have relatively high
1.0
leverage, there are now many questions about how this would
impact the asset class.
0.0
Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Figure 5: 10-year government bond yields
(10-year govt bond yield, %)
EU US UK

6
Source: Thomson Reuters, October 2022
5
Some would argue that due to the long investment horizon of
4 these assets, changing discount rates based on short-term
changes in interest and inflation seem impractical, especially
3
since infrastructure deal valuations do not fluctuate much
2 from month to month.

1 A simpler reason is that USD 330 billion of dry powder

supports valuations and keeps hurdle rates low. Essentially,
0
competition alone is propping up valuations as the private
-1 infrastructure market remains hot.
May-18

Jun-20
Dec-17

Aug-19
Jul-17

Oct-18

Jan-20

Jul-22
Apr-16
Sep-16

Mar-19

Apr-21
Sep-21
Feb-17

Feb-22
Nov-15

Nov-20

In the following pages, we have summarized 7 key lessons

learned for 2023 (and potentially beyond).
EU US UK
We offer our views on what infrastructure investors should be
Source: Bloomberg, November 2022
mindful of, how they can thrive in the current environment,
and how they can stand out from competitors. At the end of
this report we have included a summary of the latest trends in
the infrastructure markets.
1 Implied inflation expectations derived from swap
rates of inflation linked securities around the world

Page 4 of 14
Lesson 1: Be ready for a tough fundraising environment

In addition, the weak public markets create a new problem:

institutional investors’ allocation to real assets are now
mathematically higher simply based on the denominator effect
(i.e. the public markets’ share of investors’ portfolios has
decreased by more than the private markets’ share, thereby
increasing private markets’ relative size in the portfolio – see
Figure 8).
?
Since asset allocation plans are usually made near year-end,
much of last year’s infrastructure fundraising success is likely
based on decisions made before the current market turmoil.
There is a risk that this year’s fundraising environment will be
more difficult than expected, as LPs are already pushing
against (or have already exceeded) their infrastructure
allocation targets.

Compression in real yields will also disproportionately impact

the appeal of lower-risk strategies, unless they have strong
inflation pass-through. According to Preqin, a majority of
The resilience of private infrastructure in previous cycles infrastructure funds in the market right now are targeting core
(including the COVID-19 economic shock) has strengthened and core-plus strategies (see Figure 7).
the asset class’s safe haven status. Strong performance this
year has further highlighted its resilience during periods of
high inflation. We also saw record infrastructure capital raised Figure 7: Infrastructure funds currently in the market
in 2022. (by type)

However, 2023 could potentially be a tougher year for 120 120

fundraising. Infrastructure cash flows may prove to be as
resilient as advertised, and valuations may remain stable since 100 100
there is little change in discount rate or earnings, but
80 80
opportunity cost is still an issue.
60 60
When an investor can buy a 10-year US Treasury Note and get
a 4% yield, a super-core strategy with limited inflation
40 40
protection that generates a (hypothetical) 6% net return
would appear less compelling. A higher risk/higher return 20 20
strategy, or one with a strong inflation pass-through, would
appear more attractive based on real returns. 0 0
Core

Opportunistic
Infra debt
Value-add
Core-plus

Target fundraising size (USD billions) - LHS

No. of funds - RHS

Source: Preqin, October 2022

Page 5 of 14
Lesson 2: Don’t be complacent about valuations

Figure 8: 1H22 performance by asset class (%)

Global equities

Public
Global bonds

Private equity

Priviate debt

Private market performance has held up reasonably well in

Private

Real estate
2022 compared to public markets (see Figure 8). However,
with higher interest rates, investors can no longer hide behind
the benefit of cheap credit. There is a risk that investors are Infrastructure
being complacent, especially since private valuations tend to
lag public market valuations. Natural resources

In our view, there will be more divergence in performance -30 -20 -10 0 10 20
across winners and losers. Infrastructure assets that generate
strong inflation-adjusted cash flows will still perform well Source: Burgiss; Bloomberg, October 2022
Note: Private market data from Burgiss; Global equities based on MSCI
under discounted cash flow valuations, especially if there is no World; Global Bonds based on Bloomberg Global Bonds Index. Past
major uptick in the discount rate. performance is not a guarantee for future results.

However, investments relying on a rich exit multiple or high Uncertainties around financing could also negatively impact
terminal value are more at risk, especially if valuation multiples valuations. Theoretically, infrastructure with strong pricing
are tied to public market comparables, which have significantly power can pass on higher financing costs. But this usually
derated. takes time to play out, and in the near term, assets could still
face a liquidity crunch or refinancing risk. Growth platforms in
Mega funds may also target more take-private transactions to particular could see a valuation hit if they cannot grow as fast
exploit depressed market public valuations, and to quickly as planned due to a restricted financing for new projects.
deploy capital after a record fundraising year.
Finally, 2023 fundraising will be a key part of the valuation
This would further increase the valuation linkage between puzzle. If fundraising disappoints as we discussed in Lesson 1,
public and private markets, as they are competing for the the USD 330 billion of dry powder that has been propping up
same pool of capital. Weak public markets would then add the market will shrink rapidly. Infrastructure valuations will
further downward pressure to private valuations. inevitably face some downward pressure. Currently, not too
many investors are discussing this risk.

Page 6 of 14
Lesson 3: In uncertain times, go back to fundamentals

Infrastructure fundamentals have held up well in 2022.

However, the devil is in the details. Based on changes in listed
infrastructure EBITDA estimates (see Figure 9), we are starting
to see the divergence in earnings outlooks, even if overall
earnings estimates have not changed much. We believe that
the same performance dispersion will play out across private
infrastructure.

Figure 9: Jan-Nov 2022 change in EBITDA estimates for

listed infrastructure (EBITDA, %)

All listed infra

Water utilities
With high inflation and a negative economic outlook, investors
will have to ask some basic questions about their investments.
Toll roads Does the business have a moat and pricing power? Will it be
able to pass on higher costs to customers? Even with inflation
Airports
pass-through, at what point does demand destruction begin?
Electric utilities What is the extreme downside case for earnings?

Rail and other transport

Even though infrastructure investors have not changed their
Gas utilities investment hurdle rates, this does not mean that they are off
the hook. If anything, there is even more scrutiny on the
Telecom infrastructure robustness of their financial forecasts.
Renewables
Sensitivities are needed for all combinations of high inflation,
Oil and gas low inflation, strong GDP growth, and weak GDP growth to
stress test an investment. This is particularly important for
-10 -5 0 5 10
infrastructure assets because of the amount of leverage that is
typically used. Even if underlying fundamentals are strong, a
2022E EBITDA 2023E EBITDA down cycle could easily bring financial distress if leverage is
excessive and refinancing assumptions are too aggressive.
Source: Bloomberg, November 2022

A shallow but long-lasting recession is also an underrated

downside scenario. Due to the long asset life of infrastructure
investments, 1-2 years of earnings weakness usually has
limited impact on valuations (as long as there is no financial
distress), as we saw from the COVID-19 shock. However, a
long and shallow recession could potentially force investors to
take larger write-downs, as a deterioration of the cash flow
outlook over a longer period greatly impacts valuations.

Page 7 of 14
Lesson 4: Balance the risks and rewards from the evolving
definition of infrastructure

Much of this evolution is organic. As data consumption grew,

the essentiality of these assets became even more apparent.
Secular tailwinds have allowed investors to relax some of the
traditional definitions of infrastructure (e.g. less near-term cash
flows for higher growth), as these investments still check many
of the other boxes (e.g. high margins, essential services,
oligopolistic).

Similar, as renewable energy became more mature, assets with

increased merchant pricing exposure or platform deals with
limited near-term cash flow have become more mainstream,
as the sector as a whole has significantly de-risked compared
to a decade ago.

Traditionally speaking, infrastructure investments are hard However, some infrastructure funds are also targeting
assets providing essential services, and are characterized by investments that are asset-light or generate lower margins.
long asset lives, monopolistic or oligopolistic behavior, high Some of these are still good businesses, as they are often
margins, and contracted cash flows. exposed to attractive industries such as telecom or renewables.
But they are undoubtedly also riskier. Low margin services
In recent years, this definition has evolved. For example, five businesses are usually more susceptible to economic
years ago, telecom assets (e.g. data centers, telecom towers, downturns, as demand for them is more discretionary.
fiber networks) were on the peripheral of what is considered
infrastructure. In 2022, telecom assets accounted for almost Secular growth businesses also face higher valuation risks.
20% of global infrastructure deal volumes (see Figure 10). Based on time value of money, cash now is worth more than
cash later. Prolonged economic weakness would further
pressure valuations of businesses that generate little cash
Figure 10: Global infrastructure deal volumes flows now and rely too much on long-term growth. The de-
(closed infrastructure transactions, %) rating of tech stocks in public markets is a warning sign of
this.
100
On the other hand, as discussed in Lesson 1, if the value of an
80
asset mainly comes from near-term cash flows, the real returns
look less attractive unless it has a very high cash yield that is
benefitting from inflation.
60

Investors therefore face a dilemma: should they invest in

40 secular growth that is riskier in the current environment, or
should they invest in less risky core assets with strong cash
20 flows that offer relatively unattractive real returns?
The answer depends on a deal by deal basis, and basic
0 business fundamentals will likely be the deciding factor, as
2017 2018 2019 2020 2021 2022 YTD discussed in Lesson 2.
(Jan-Oct)

Power & renewables Oil & gas Transport Telecom Others

Source: Inframation, October 2022

Page 8 of 14
Lesson 5: From reactive to proactive asset management

As infrastructure business models continue to evolve, investors

must roll up their sleeves and take a more proactive role in
asset management. Gone are the days of acquiring an
investment, and assuming that it will generate cash flows non-
stop from the beginning until the end of asset life.

For example, many clean energy and telecom infrastructure

investments are now platforms, which means investors are not
just acquiring a portfolio of operational assets. They are also
acquiring management teams that will monetize a pipeline of
growth projects.

Investors need to ensure that they hire the right people to Finally, climate risk has also become more tangible for real
execute these growth strategies, have appropriate incentive assets in recent years (see Figure 11). We have seen data
programs in place, the right organizational structures, and centers suffering outages during heat waves, port volumes
potentially recruit industry experts to provide more hands-on declining due to dried up rivers, and wind turbines freezing
guidance internally. during winter storms. Managers may need to adopt more
robust maintenance programs, upgrade existing equipment,
Changes in technologies and policies are also an important explore financial hedges, or amend commercial contracts to
factor when managing assets. Even if an investment appears ensure resiliency.
to be performing well and firing on all cylinders, managers
need to be proactive in future-proofing them.
Figure 11: Global weather-related insured losses
Is there new technology that can enhance asset performance? (USD billions)
Or on the downside, increase competition? Does a more
rigorous ESG framework need to be put in place to satisfy 200
future reporting requirements? Will certain policy changes
help or hurt the asset? These are the types of questions that
160
asset managers should constantly be asking themselves.

120

80

40

0
2011
2007
2008
2009
2010

2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022E

Source: Aon 3Q22 Global Catastrophe Recap, October 2022

Page 9 of 14
Lesson 6: Expect more price volatility from gas globalization

The build out of LNG is changing this dynamic. For example, in

June 2022, the Freeport LNG terminal in the US had to shut
down after an explosion – the immediate reaction was a 20%
decline in US natural gas prices, and a 40% increase in
European prices in the subsequent week (see Figure 12).

Figure 12: Natural gas prices (USD/MMBtu)

12 100
Russia
Freeport
invades
LNG outage
Ukraine
10 80

8 60

6 40

4 20

2 0
May-22
May-22
Jun-22
Jan-22
Jan-22

Aug-22
Aug-22
Feb-22
Mar-22
Mar-22
Apr-22

Sep-22
Oct-22
Oct-22
Jul-22

The global energy crisis has made energy prices untenable in

regions such as Europe, where energy contributed to almost
half of its inflation in 2022. These high costs are enough to
drive local economies into a recession, as manufacturers can USA (Henry Hub) - LHS Europe (TTF) - RHS
no longer afford to pay for energy, and industrial output gets
curtailed. Source: Bloomberg, October 2022

The impact on the US has been more limited, as it is This linkage did not exist before the build out of US LNG
resource-rich and energy only contributed to less than 20% of terminals, and is a sign that investors have to be more
its 2022 inflation. The crisis also opens up significant prepared for these types of events.
opportunities for the US to accelerate the expansion of
liquefied natural gas (LNG) capacity. Since natural gas prices usually set the marginal price of power
in most markets, even global electricity prices could become
However, the unintended consequence of LNG is that natural more interconnected with each other. In addition, the
gas (and even electricity prices) will become more globalized. acceleration in renewable energy adoption will further increase
Unlike commodities such as crude oil, which has always been a power price volatility due to the intermittent nature of these
global market, natural gas and electricity prices have resources, which will add to price volatility everywhere.
historically been more localized due to difficulties in
transportation and storage. Investors will need to have a more global outlook for energy
markets, expect stronger revenue correlations across
geographies, be more aware of events around the world (i.e.
weather, policy changes, force majeure etc.), and prepare for
greater price volatility.

Page 10 of 14
Lesson 7: Don’t leave politics out of it

The current inflationary environment has exacerbated the cost-

of-living crisis around the world, leading to more populist
government policies and intervention. This includes price cap
on energy, windfall taxes, new regulations and even
nationalization.

Some of these are necessary given a part of a government’s For example, investors were surprised by the enactment of the
social contract with its citizens is to protect their basic US Inflation Reduction Act, which has become the most
necessities. Nevertheless, it sets a precedent for future important clean energy legislation in recent history. The lesson
government intervention, and potentially raises the long-term here is that public opinion matters, and issues that receive
risk premium. Investors can no longer count on perpetual broad political support (i.e. decarbonization) will have more
regulatory benevolence even in previously investor-friendly regulatory tailwinds.
jurisdictions.
Politics are notoriously difficult to forecast. Investors should
Governments around the world also appear to be disregarding have a pulse of the political climate, but they should also make
decarbonization goals with the restart of coal-fired facilities conservative assumptions around policies. One potential
and fossil fuel extraction. In this regard, it is important that mitigant is to scrutinize the strength of legal contracts (and the
investors look at the bigger picture. High fossil fuel prices may stability of relevant judicial systems) to ensure their
force governments to take extreme short-term action, but investments are protected even when there is political turmoil.
longer term, it would also accelerate the energy transition as
countries scramble to look for alternative energy sources.

Private infrastructure markets

In this section we look at the health of the infrastructure

equity and debt markets in terms of performance and
valuations.

Infrastructure equity
According to both MSCI and Burgiss, global private
infrastructure was +5.6% in the first half of 2022, even
though public equities2 were -20% over this period.
Interestingly, according to MSCI, private infrastructure
performance is increasingly driven by the income rather than
the capital return component (See Figure 13).

2 MSCI World Index

Page 11 of 14
Figure 13: Infrastructure performance Figure 14: Private and public EV/EBITDA multiples
(gross total return %, local currency) (EV/EBITDA multiples)

20.0 16.0

15.0 14.0

10.0
12.0

5.0
10.0
0.0
8.0
-5.0
6.0
-10.0

2015
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014

2016
2017
2018
2019
2020
2021
2022
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022E

Private infra (Mean) Private infra (Median)

Income return Capital return MSCI World

Source: MSCI Global Quarterly Private Infrastructure Index, June 2022 Source: UBS Proprietary Database; Mergermarket; InfraNews; Bloomberg,
Note: 2022E is based on annualized 1H22 data. Expected / past November 2022
performance is not a guarantee for future results.

The rising cash yield suggest that near-term earnings are If we break down the valuation multiples by sector, we are
exhibiting strong inflation pass-through, although as discussed also seeing a divergence in trends. For example, telecom deals
in Lesson 2, factors such as demand destruction could put a fetch higher multiples because of their earnings growth
cap on this. On the other hand, diminishing capital returns potential (see Figure 15). Meanwhile, energy is finding support
show that there is risk to growth strategies, which we also from high commodity prices. On the other hand, transports
discussed in Lessons 2 and 4. Finding the right balance across have seen some derating.
cash yield, inflation passthrough, and long-term growth is the
key. Investors can no longer count on cheap financing to
support returns, and we believe that there will be greater Figure 15: Private infrastructure EV/EBITDA multiples by
divergence in performance across different infrastructure industry (EV/EBITDA multiples)
assets moving forward.
25
EDHEC’s private infrastructure index was -5% for the first nine
months of 2022, and is still significantly outperforming public 20
markets. 3Q22 was relatively flat vs 2Q22, indicating some
stabilization after initial weakness. EDHEC’s valuation 15
methodology is more reliant on changing discount rate
assumptions, which explains why it is more negative than
10
MSCI or Burgiss.

5
We track the private infrastructure EV/EBITDA transaction
multiples (Figure 14) based on over a thousand data points
over the years. Both mean and median private infrastructure 0
2017 2018 2019 2020 2021 2022 (Jan-
2022 (Jan-Nov)
YTD
multiples actually remain elevated, despite the significant
decline in public multiples. As discussed, this explains why Telecom Energy & utilities
valuations and performance remains strong for private Transport Water & waste
infrastructure, although the risk is skewed to the downside.
Source: UBS Proprietary Database; Mergermarket; InfraNews; Bloomberg,
November 2022

Page 12 of 14
We believe that the investable universe for infrastructure will 2021 was a record year for European infrastructure financings.
continue to increase, especially on the back of the Inflation 1H22 was around 11% higher than 1H21, however, we
Reduction Act, the global energy crisis, and increased potential expect volumes for 2H22 to be lower relative to 2021. As for
for take-privates. In addition, fiscally constrained governments infrastructure equity, we think demand will be strong for
will also need to rely more on private capital to fill the funding defensive businesses with the ability to pass through higher
gap for infrastructure. costs.

However, if fundraising begins to falter (as discussed in Lesson

2), we could start seeing declines in dry powder for the first Figure 17: European infrastructure debt (USD billions)
time since 2014, which will impact infrastructure valuations
and also performance. 180 900

160 800
Infrastructure debt 140 700
Rising base rates and spreads are positive for the relative
120 600
attractiveness of infrastructure debt strategies. Total returns
100 500
for senior infrastructure debt in Europe have increased by
around 3% last year until September to 5-6%, comparable 80 400

with core infrastructure equity returns. 60 300

40 200
Public market spreads for European BBB non-financial 20 100
corporates have increased by around 70bps last year until
0 0
September, while high yield credit has risen by around 1H18 2H18 1H19 2H19 1H20 2H20 1H21 2H21 1H22
185bps. Private market spreads adjust to reflect public markets
with a lag, provided the spread increase in sustained. Capital market (LHS)
Loan debt (LHS)
# transactions (RHS)

Figure 16: Spreads on private infrastructure debt Source: Infralogic, November 2022
(basis points)
1000

800 Conclusions
600

400 Private infrastructure has seen record fundraising, strong

performance and steady valuations in 2022. However,
200
investors should not be complacent, as we see more risks
in the market in 2023.
0
1Q16
1Q15
3Q15

3Q16
1Q17
3Q17
1Q18
3Q18
1Q19
3Q19
1Q20
3Q20
1Q21
3Q21
1Q22
3Q22

Investors can no longer rely on cheap credit to deliver

investment returns. There will be greater divergence
BBB NFC Spread across winners and losers, and those who want to thrive
BB NFC Spread will have to go back to the basics – robust business
European Infra (IG Proxy) fundamentals, rigorous investment analysis, and active
S&P European Leveraged Loan Index asset management.

Source: Bloomberg; EDHEC Debt Indices (Europe); S&P European Leveraged

Loan Index; UBS Asset Management, Real Estate & Private Markets (REPM),
Overall, the infrastructure industry will continue to see
September 2022 significant secular tailwinds from megatrends such as
digitalization and decarbonization. But investors will
The higher cost of debt may impact the volume of transactions need to be more realistic about their expectations, and
as the attractiveness of refinancing reduces. Sponsors may also analyze their current portfolios and future investments
revise capex/rollout plans if the levered economics no longer with greater scrutiny. Diversification will also become a
meets their return-on-investment hurdles. key way to mitigate the uncertainties.

Page 13 of 14
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