Infrastructure investments are attractive partly because they provide downside protection. The theory behind the downside protection narrative is quite strong: Infrastructure investments are made on assets that are monopolies or near-monopolies so the demand is very inelastic in income and in price. In other words and pushing a couple of steps, the revenues and hence the cash flows remain stable and are forecastable in the long term. All we need now is to wait for the downside cases to materialise and test our theory empirically.
The challenge is that between 2009 and 2018, well, let’s say between 2009 and mid-2018, the equity markets in the developed world did quite well, so the downside protection could not get tested. Even the European sovereign debt crisis of 2010-2011 did not provide enough evidence in either direction since it separated the periphery from the core in Europe, and the core markets did reasonably well.
Brexit and the very high level of uncertainty surrounding it provide a good test case though. The United Kingdom has been a deep infrastructure market, arguably the deepest considering the size of its population. From PPP/PFIs to regulated utilities to airports, the UK has been a welcoming market for investors globally for more than two decades now. Any institutional investor with a significant allocation to infrastructure is most likely to have sizeable UK exposure. So every infrastructure researcher wrote memos on “Brexit” and most such memos concluded “no-impact” is the case based on the particulars of the specific investments.
It is still too early to call, but aggregate data so far also suggest no-impact. First, the deal flow has remained quite stable after the Brexit referendum.
Renewables, the largest sector in terms of the number of deals show quite a similar pattern. Even though the sector specific changes such as the April 2016 deadline for Renewable Obligation accreditation for onshore wind farms played significant roles in deal volumes.
Data on transaction prices are harder to get and are more patchy, but nevertheless based on what is available, aggregate transaction volumes demonstrated strong growth, suggesting healthy asset price increases in the infrastructure space.
Infrastructure investments in the UK so far did what they are supposed to do around the Brexit turmoil. Let us see what 2019 brings.