Infrastructure: a resilient strategy in uncertain times

IN 2005, GIC set up a dedicated team to invest in infrastructure businesses and was an early entrant in the sector. In the two decades since, it has refined its investment strategy through multiple economic cycles.

Today, infrastructure investments form a large and critical part of GIC’s portfolio.

GIC defines infrastructure as investments with a combination of stable and predictable cash flows, the ability to pass through inflation, and low risk of obsolescence. Their returns tend to be resilient across macroeconomic cycles due to the defensive nature of the underlying assets.

Infrastructure assets undergird economies and are essential for safe modern living. Quality infrastructure provides access to clean water and a reliable electricity supply, as well as digital and physical connectivity.

GIC’s infrastructure portfolio includes companies that develop and operate airports, seaports, electricity utilities, renewable energy generation, fiber networks, and telecommunication towers.

A range of possibilities

The range of infrastructure investments evolves with the emergence of new needs and technologies. This has generated healthy growth in investment opportunities for GIC.

First, existing infrastructure businesses require consistent, long-term investments to continue serving their communities effectively.

Second, awareness and the critical nature of climate change and energy security have widened opportunities in energy transition.

Third, digitalisation trends such as increased data consumption and cloud migration have been turbocharged by the Covid-19 pandemic and the advent of artificial intelligence, requiring increased digital infrastructure capacity.

In line with the world’s growing demand for data and bandwidth, the digital infrastructure sector has seen a marked increase in investments across various markets. Some recent investments by GIC include Cellnex, Cetin Group and Searchlight Fiber Alliance.

Cellnex is Europe’s largest independent telecommunications tower company, which signs long-term, inflation-indexed contracts with network operators and enables broad and fast connectivity to individual consumers and businesses.

GIC first acquired a minority stake in Cellnex in 2018 and has since supported it through additional financings, contributing to its more than five-fold growth to more than 147,000 tower sites today.

Cetin Group is the largest provider of network infrastructure in the Central and Eastern European region, with GIC taking a 30 per cent stake in 2021.

And in 2022, GIC invested in Searchlight Fiber Alliance, a fibre-to-the-home platform targeting suburban areas across the United States that lack access to high-speed broadband.

According to Global Infrastructure Hub, global infrastructure investment needs are expected to total US$94 trillion between 2017 to 2040. This implies an average of US$3.9 trillion per annum.

In an increasingly uncertain macroeconomic environment, it is unsurprising that infrastructure has become a popular asset class for large institutional investors and fund managers. This has led to increased competition and higher entry prices for investors.

The larger opportunity set has also widened the nature of risks. Regulatory risks have gone up in some jurisdictions, due to national security concerns and the need to mitigate inflationary pressures.

Infrastructure investors need to be attuned to the multitude of risks, account for the needs of a wide range of stakeholders, and invest mindfully.

Providing resilience to portfolios

GIC typically invests in infrastructure businesses with high barriers to entry, regulated returns, and/or long-term contracted revenue models. Such businesses generate stable, predictable, and often inflation-protected cash flows across macroeconomic cycles.

GIC also chooses businesses that can remain competitive in the long term and have good potential for growth.

To date, our infrastructure investments have yielded healthy and stable returns for GIC’s total portfolio and support our long-term investment mandate. They also help to diversify the total GIC portfolio because of their low correlation with other asset classes.

Each infrastructure investment is assessed for five key characteristics that speak to the qualities of its business and underpin its investment thesis. These characteristics are cash flow predictability, inflation linkage, barriers to entry, yield certainty and low obsolescence risk.

Even as we ensure investee companies have cash-generative assets today, our team maintains strong awareness of obsolescence risk. We constantly try to position ourselves early for opportunities in evolving sectors that mature and become less risky over time.

For instance, to prepare for the energy transition, GIC has made early investments in renewable energy companies, future fuels such as green hydrogen, long-term energy storage, and carbon capture and sequestration.

One example is Acen, a renewable energy platform of the Ayala Group, one of the largest conglomerates in the Philippines and a long-time partner of GIC.

In 2020, GIC invested in Acen to help fund the development of its renewable energy project pipeline, enabling it to accelerate and expand its green investments across the Asia-Pacific region.

While the Philippines remains Acen’s core market, its reputation as a strong partner has opened opportunities in developing countries with large renewable energy requirements, such as Vietnam.

It recently built on this success by acquiring control of its Australian platform to participate fully in the country’s energy transition.

Acen’s investment programme in the coming years will further contribute to the significant renewable energy roll-out required to reduce the Asia-Pacific region’s reliance on fossil fuels.

Diversification and sustainability

The resilience of GIC’s infrastructure portfolio is further enhanced by diversifying across regions and sectors.

Developed market assets make up 71 per cent of our total infrastructure portfolio. These mainly comprise assets with mature, low-to-moderate risk.

Our emerging markets portfolio includes investments with higher growth potential and makes up 29 per cent of the total infrastructure portfolio.

GIC’s institutional familiarity with emerging markets has enabled us to be an early investor in its infrastructure sector. Relative to our peers, we have a sizeable infrastructure portfolio in emerging markets.

With a long-term investment orientation, our infrastructure investment team looks forward to working with businesses seeking good, sustainable growth.

An example is Aegea, a Brazilian water supply and sewage treatment company. GIC acquired a minority stake in Aegea in 2013.

Since then, we have supported the company through multiple investment rounds and helped strengthen its governance, enabling Aegea to grow its customer base nearly 15 times, from two million consumers to 31 million.

Aegea acquires municipal water companies and improves their operations, efficiency, and service levels, while investing the necessary capital expenditure to expand service coverage and reduce water leakage.

In addition, by drastically reducing or eliminating the discharge of raw sewage into the river systems and seas, Aegea’s services have noticeably benefited the environment and well-being of communities it serves.

A four-quadrant strategy

Underpinning GIC’s infrastructure approach is a four-quadrant investment strategy that allows the team to invest across multiple parts of the capital structure via different investment structures.

The quadrants are: equity direct or co-investments; listed equity; funds; and credit.

Specifically, the strategy comprises primarily direct investments in private or listed infrastructure businesses, either through equity or non-investment grade infrastructure credit.

Select investments with well-regarded fund managers complement the direct investment portfolio.

By leveraging the four-quadrant strategy, GIC’s infrastructure team operates efficiently and flexibly to capture attractive risk-adjusted opportunities in the sector while maintaining a steady investment pace and portfolio growth through economic cycles.

The four-quadrant investment strategy is supported by two specialist units – the Asset Management (AM) team and the Global Investments, Strategy, and Risk (GISR) team.

The AM team, led by senior executives with backgrounds in industry, ensures that investee companies are operating efficiently with good governance to achieve sustainable returns.

The GISR team complements the investment process through portfolio construction, risk monitoring, and individual deal reviews. It actively stays abreast of drivers such as climate change and technology disruption that pose both risks and opportunities to GIC’s infrastructure portfolio.

As the world moves towards a greener and more digitalised future, our infrastructure investments team will continue to use its expertise to access new opportunities. The asset class is an integral part of GIC’s diversified portfolio, contributing to sustainable, long-term, and inflation-protected returns for Singapore.

The writer is chief investment officer for infrastructure at GIC