Infrastructure sub-sectors
Does anyone have any insight as to which infrastructure sub-sectors are/aren't attractive at the moment based on valuation/outlook?
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Mainly on the energy transition side where you have most trendy sectors like hydrogen, BESS, CCUS, EV charging. Traditional renewables are pretty solid.
Data Centers were super hot a year ago but the valuations on public comps have crashed. Telecom Tower Companies are a great business model but have also been hit very hard. That is largely just because (due to their incredibly secure cash flows) they were valued at very high (+20x EBITDA) multiples and got killed by the increase in the discount rate. Public European TowerCos have something like a 0.7 negative corrrelation with long dated European bonds.
Renewables have held up well. The issue for infra funds is that they have become so well understood that big pension and insurance funds are moving in. They have much lower costs of capital and so can outbid infra funds on deals. These low cost of capital players are good for infra fund exits though. A lower re-buyer IRR means a larger sale price and higher seller IRR.
I would say
Hot - Gas Fired Power Putin's invasion drove up gas prices and spark spreads, so gas fired generation is really hot right now. Valuations of 3-4x 2021 levels almost and lots of capacity support from ISOs
Hot - Transmission More renewable build out has created grid instability so most power markets are trying to fix this by importing power from other regions, lots of transmission development deals (Transwest express, Champlain Hudson, etc)
Okay - Ports / Airports Was hot in inflationary environment but outlook grim given potential recession
Okay - Renewables (Offshore or Onshore Wind/Solar) Regulatory tailwinds (IRA, etc) and natural corporate focus on the transition still support these assets, but again its hard to target 6-10% levered yields with rates where they are so they're not as attractive
Cold - Government Sponsored P3s Returns are already tight given how structured these investments, now you add on a high cost of debt and it doesn't make a lot of sense to target 8% levered return deals when you can get the same thing buying IG corporate paper, just buy the IG corporate paper. This will do a flip once there is a market crash of some kind and government starts putting the Fed's balance sheet to work.
Cold - Renewables (RNG/CCUS/Etc) These projects are pretty risky and often don' t work unless some type of offtake/contract structure, so just not worth it yet
Thermal generation transacting at some pretty crazy valuations rn depending on the ISO lol.
I would say
Hot - ERCOT: Energy only market with a price cap of $5,000/MWh so you have plants making 95% of their margin in 1 week of the year, pretty attractive if you're a peaker tbh, but combined cycles do well too
Hot - CAISO: Almost stupid renewable build out made the grid particularly bad here so now you have resource adequacy contracts at >$10.00/kW-mo stretching up to 2030s
Okay - WECC/DSW: Energy only generators generally come with long-term offtake tolls at really good levels
Okay - NYISO - Depressed capacity prices (especially in Zone J NYC) last few years made this less attractive but a few retirements in PJM (namely Homer City) will make this more attractive for a little bit before Champlain Hudson comes online
Okay ISO-NE - FCA 18 (for 2028) cleared pretty low but its still a good market, so I think there will be a fundamental shift from capacity to energy
Cold - PJM (but not for long) - performance events in December put a lot of generators out cold, this market is going to be cold for a bit but the market fundamentals remain really strong so I personally think its a good time to buy
Cold - MISO/SPP - Just a ton of utilities messing around so you're never competitive here
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