Author: Gianfranco Saladino, Head of Sustainable Infrastructure Investments
Megatrends beyond energy transition, such as urbanisation/smart cities and digitalization are here to stay and will further materialize in infrastructure investments in emerging and frontier markets. Furthermore, private capital will play a prominent role in closing this gap due to the aggravating strain on governments’ balance sheets following the pandemic.
Looking back, prior to the Covid-19 outbreak, many emerging economies had already launched significant infrastructure programs (especially on the energy side), and these associated investments are not expected to drop off to the same extent as seen in previous crisis periods.
The energy sector, in particular renewable energy, remains in focus for investors. A combination of spill-over and learning effects across EM, further reduction in capex and lifecycle costs for renewable energy installations, as well as the increasing importance of climate action on EM governments’ agendas will contribute to more international private capital flows into EM renewable investments. This is leading to further competition in certain emerging countries (e.g. within South East Asia) which in turn is putting pressure on returns.
Nonetheless, BlueOrchard remains very selective on the renewable energy side and is focusing on Commercial and Industrial (C&I) distributed energy solutions with a platform approach and junior debt situations.
As an example, Telecom infrastructure has proven to be very stable and has in fact fundamentally even benefitted from the pandemic, and demand for data traffic and connectivity has significantly increased. We believe that significant investments will still be needed to reduce the digital divide between rural and urban areas in Emerging and Frontier markets. Telcom incumbents do not have the balance sheet nor the intention to focus on infrastructure-related investments and therefore we see significant opportunities for private capital to finance transactions such as telecom towers and fiber assets. The mentioned sector has increasing potential due to the strong fundamentals (increasing demand driven by IoT/connectivity and demographic development in EM, technological upgrades).
Lastly, the pandemic has also shown the urgent need for more investment in health infrastructure in several emerging markets, a sector that so far has not been on the radar of private investors in these developing regions. However, BlueOrchard remains hesitant to classify health-related investments as infrastructure due to the underlying asset characteristics and risk exposure (volume risk etc).
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