This year’s edition of the World Energy Investment report presents the latest data and analysis of how energy investment flows are recovering from the shock of the Covid-19 pandemic, including full-year estimates of the outlook for 2021. It examines how investors are assessing risks and opportunities across all areas of fuel and electricity supply, efficiency and research and development, against a backdrop of a recovery in global energy demand as well as strengthened pledges from governments and the private sector to address climate change.

The report focuses on two key questions:

  • Whether the growing momentum among governments and investors to accelerate clean energy transitions is translating into an actual uptick in capital expenditures on clean energy projects.
  • Whether the energy investment response to the economic crisis caused by the Covid-19 pandemic will be broad-based or if some sectors, geographies and vulnerable parts of the world’s population will be left behind.

Click here to read the full report

An opinion piece from Robert Armstrong, Financial Times: “We’ve got big global problems. I am a capitalist red in tooth and claw, but I just can’t see how financial markets have a meaningful part to play in solving these problems until citizens and governments act first and decisively.”

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An opinion piece from Robert Armstrong, Financial Times: “My piece about Tariq Fancy and the case against ESG generated a great deal of mail. At least half of it was positive, mostly in the “thanks for pointing out that the emperor has no clothes” vein. A small minority made ad hominem attacks, which is even more encouraging for a journalist than praise.”

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The sharp market falls triggered by the pandemic brought the longest recovery ever in modern finance to an abrupt end. But despite the turmoil unleashed by COVID, it has not wrung out the market excesses of the last 13-year cycle. It means another wave of corporate failures could appear on the horizon in a shorter timeframe than expected, and offer more opportunities for distressed debt investors, according to Victor Khosla founder of SVP Global.

Speaking at FIS Digital 2021, Victor Khosla, founder and chief executive of SVP Global said that because the ECB and Fed have written such massive cheques, many people “got a pass.” For sure, sectors like leisure, travel and real estate have had to restructure, but other businesses never got fixed.

It means all the ingredients are in place for another, more real correction, he said.

As for the catalyst, changes in inflation and interest rates are obvious contenders, but other factors that investors “can’t figure out” (like COVID) could just as easily surprise. That said, he warned that central banks are not letting go of the policy levers, and counselled against betting against the Fed.

Opportunities

The most obvious opportunities at the beginning of the crisis lay in liquid large cap companies. These companies were not filing for bankruptcy, but typically looking to sell assets. Next, the opportunity evolved with corporate restructuring by another swathe of companies (Virgin Atlantic and JCPenney, for example) running out of money although Khosla noted that these businesses don’t offer the best opportunities.

The second half of 2020 and this year have seen more exciting opportunities, whereby good companies with capital structure problems provide investor opportunities. Most of the early opportunity was in the US, he said noting how good the US is at creative destruction whereby sectors take on losses clear up and move on. In contrast, that process is not as advanced in Europe he said, reflecting on how SVP Global has a 75:25 US/Europe bias today in contrast to its usual 50:50 US/Europe split.

When it comes to opportunities, Khosla looks for specific characteristics, choosing businesses that are either resilient through a recession or which if cyclical, bounce back after a crisis because of their strong market share.

“We get a chance to buy them at their lowest,” he said, describing the firm’s ability to take ownership of the majority of debt and equity in the restructuring process as a broad hunting license.

For example, the firm has a large equity stake in Swissport International, part of debt-laden Chinese conglomerate HNA Group following debt equity restructuring. Elsewhere, the firm is a creditor of Washington Prime Group’s open air mall business where he sees steady and growing traffic. Other opportunities include telecoms and packaging businesses and a building products company, all typically characterised as private deals and not on the radar.

European lag

Khosla explained further how opportunities in Europe have lagged the US. Europe’s recession has been much worse than the US where 2020 GDP declines have not been as steep and the 2021 recovery much stronger. In contrast he described the European recovery as anaemic, adding that Europe was in an economically worse position that the US pre-crisis, not helped by Germany and Italy being close to recession and the travails of the region’s banking sector.

In conversation with Kristian Fok, chief investment officer at Cbus Super Fund, Khosla said that although distressed debt investment sounded brave it didn’t involve catching falling knives.

“The asset class has a good sense of its own limitations,” he said. For example, he counsels against investing in distressed tech assets because the pace of change is so rapid, by the time bankruptcy and restructuring processes are over the technology has changed.

“This is not for us,” he said.

Elsewhere, he noted how many hard asset businesses are in secular decline and should therefore also be avoided – here he cited the falling demand for paper as having an impact on the paper and pulp business.

He also described emerging markets as way above our pay grade given the different bankruptcy codes and challenges around fixing businesses in emerging markets.

To further illustrate the caution inherent to distressed investment, he said cash flows in many of the companies the firm has stakes in actually spiked through the 2019 and 2020 recession. He also noted that the real opportunities in the sector exist for investors who have operating teams to fix and improve businesses, and who are more than paper investors. For these investors, opportunities will continue to exist despite the overall level of defaults coming down, he concluded.

Investors discuss how technological change and the new green economy is re-pricing assets in infrastructure, as well as the trend to substitute fixed income with infrastructure debt. But investors should not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central. 

Speaking at FIS Digital 2021 in an expert panel on infrastructure investment, US firm Cohen & Steers’ head of global infrastructure Ben Morton explained how the firm focuses on investing in companies that “collect fees.” He added that the firm buys listed infrastructure assets which have an economic sensitivity that suits active management.

“Investments have a link to GDP or have pricing mechanisms that link revenues to inflation, providing inflation protection through the cycle,” he told delegates.

Commenting on President Biden’s plans for sweeping infrastructure investment, he said that unlike previous administration pledges, this fiscal stimulus could benefit listed infrastructure. He said Biden’s plans are different and could have important investor consequences around, for example, tax cuts and renewables. Extending tax credits for solar and wind makes these projects more profitable, he said. Elsewhere, driving 5G development will enable greater penetration for tower companies, and putting trillions into the economy is a good thing for economically sensitive businesses like freight railway.

Windfall opportunity

Investors can find infrastructure opportunities in long-term, fixed rate, secured assets and pick up a yield premium over corporate bonds, said fellow panellist Dominic Swan, global CIO of private debt at HSBC Asset Management. Higher yields can be found in non-investment grade allocations, however he cautioned that this shouldn’t be viewed as a long-term strategy.

“You don’t want to sign up to a 25-year exposure to a high yield asset,” he said. Swan also noted that while inflation doesn’t increase cash flows it pushes up an asset’s market value so that in periods of high inflation, infrastructure credit risk falls. He added that this is priced into how debt products are valued in the market, providing a windfall opportunity.

Infrastructure in, fixed income out

HSBC’s Swan also noted trends among investors substituting fixed income with infrastructure debt.

“We find people selling government bonds and replacing the allocation with investment grade infrastructure,” he said, noting a pick-up of 70-100 basis points in the investment grade space.

But investing in infrastructure in the current climate holds challenges. At Canada’s Alberta Investment Management Corporation, Ben Hawkins, senior vice president, infrastructure, said investor demand for infrastructure as a substitute for fixed income has pushed up demand but there is not much new supply.

His areas of focus include renewables, telecoms and digital infrastructure given new trends in remote working. That said, not all opportunities fit within a traditional infrastructure mandate, and he warned that this means risks and uncertainties preside.

Other trends include data increasingly helping resolve intermittency challenges in renewables and the reduced capacity issues currently faced by utilities.

“We are looking at the digital sphere to optimise delivery of services,” he said, referencing the need to future proof traditional assets.

Technological disruption

This led the conversation to the danger of infrastructure assets becoming obsolete in the new green economy. The number of stranded assets could spike in traditional energy infrastructure as well as assets subject to technological change, said Hawkins.

However, he argued that traditional gas pipeline infrastructure is less likely to be stranded in the transition. Gas will continue to be an important part of the fuel mix, he said.

Elsewhere technological disruption is growing in the satellite space. Over-the-top technologies provided by high-speed internet like Netflix on-demand are disrupting traditional services from cable and satellite providers.

“We need to be on top of this change,” he said.

However, he warned investors not to lose sight of traditional infrastructure characteristics in their quest to tap new trends. Predictable cashflows and downside protection remain central. Incremental investment dollars are going into new themes, but we are not going to start investing in new businesses that don’t have infrastructure-like characteristics, he said.

At HSBC, strategy is centred on drilling down to the fundamentals, namely stability of cashflows. In this aspect, renewables and digital infrastructure differ with renewables often linked to quasi-guaranteed cashflows comprising long term contracts with lower volatility.

In contrast, digital assets are typically subject to huge change as the revolution continues. Hence the need to adopt a shorter time frame when investing in digital assets.

“Given that we are exposed to change, and change is not a friend of debt holders we expect to be paid for the risk of technological obsolescence,” he said.

In response to questions around competition for assets, Hawkins noted how investors were moving up the risk spectrum and said that renewables were increasingly priced to perfection.

Strategy at AIMCo has taken a platform approach whereby the investor bypasses the competition by acquiring operational assets with a particular focus on the skills of the team on the ground, leveraging their operational and sector specific knowledge for advantage. It amounts to a less crowded trade, he concluded.

Renewable power investment continues to outperform fossil fuel investment across the globe, according to the latest research. This provides a strong signal regarding the decline of fossil fuel investment. Given that IRENA has projected achieving Paris targets will require $4.4 trillion a year into low carbon energy, this can only be a positive for achieving 2050 goals.

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