Finding areas of resilience within Global Infrastructure

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Over the past several weeks we have posted blogs with the theme of "finding areas of resilience" that discussed how the COVID-19 pandemic is having a varying impact on Commercial Real Estate and Commercial Mortgages. The blogs highlighted areas that have fared well against the headwinds that have accompanied the COVID-19 pandemic. In continuing with this theme, today's blog will shift our focus to Global Infrastructure.

The COVID-19 pandemic's impact on Global Infrastructure

Infrastructure, by definition, are assets that provide essential services to the economy, somewhat insulating them from the shut-down of non-essential businesses. However, infrastructure as an asset class has a wide and expanding definition, and not all infrastructure is created equal.

The resilience of certain segments of infrastructure through times of stress, like we are experiencing today, is dependent on several factors, including stability of cash flow, organic growth and high-quality management. These factors are essential to infrastructure providing diversification, return enhancement and inflation protection.

To help highlight the areas of resilience within this space during the COVID-19 pandemic, the Alternative Investments Team at TD Asset Management Inc. (TDAM) has written a paper titled Finding Resilience During a Pandemic: Global Infrastructure. The article has a focus on income streams and the importance of a steady and predictable revenue stream.

Harnessing predictable income streams during unprecedented times

Infrastructure investors require highly predictable revenue to justify the significant investment, and this revenue can come in several different forms:

  • Regulated revenue
  • Long-term contracts
  • GDP-linked or usage revenue

Each one of these varies in how predictable the revenue of the asset will be.

For example, regulated revenue or long-term contract payments are often set for decades with dependable counterparties providing significant resiliency to the asset in times of stress. GDP-linked or usage revenue on the other hand depend on individual customers, such as planes through an airport or cars on a toll-road. For the latter, these revenues can fluctuate and, given the unprecedented nature of the COVID-19 pandemic response, GDP and usage linked assets have seen the greatest stress with volumes being down 50-70% in some cases.

In the current environment, the value of regulated and predictable revenue streams comes front and centre. For example, The TD Greystone Infrastructure Fund focuses on stable and growing cash flow. To this point, the TD Greystone Infrastructure Fund entered 2020 with 93% of its revenue contracted and/or regulated. This greatly limited the cash flow impact of the pandemic and helped stabilize overall investment programs.

The article also provides an interesting case study around the impact the COVID-19 pandemic has had on airports, and by extension, infrastructure investing and underscores the importance of local management teams. Within our investment platforms, local management teams are responsible for the day-to-day operations of the infrastructure and for future development. Also, having specialized management teams focused on specific sectors in specific geographies not only provides us with strong management of existing projects, but also enhances the opportunity for growth.

The value of our expertise

The economic consequences of the COVID-19 pandemic continue to unfold and, unlike previous crises, there are direct impacts to real assets in the form of income disruption due to government-imposed restrictions on business activity. For alternative investment managers, portfolio construction, asset quality, managing relationships and risk management are critical factors in navigating the current environment. Moreover, during this pandemic, there are areas of the market that continue to provide enhanced income stability, capital preservation and income growth potential.

Ultimately, the role of real asset investments within an investor’s total portfolio mix remains steadfast in providing attractive income, lower correlation and improved diversification with other asset classes, translating into higher expected risk-adjusted returns for total investment programs.

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