quarterly valuation update for the energy and

Quarterly valuation update for the energy and infrastructure sectorQ2 2021

2

Welcome to the Q2 2021 edition of our quarterly valuation update, which provides a snapshot of some of the main publicly available valuation trends across the energy and infrastructure sector, covering both debt and equity metrics.

This quarter we continue to look at trends in debt and equity metrics relying primarily on publicly available information. In relation to the equity trends, we use the Mazars index of listed infrastructure funds, compiled on the basis set out in Appendix 1 to this update.

In addition, this quarter we have included a spotlight on digital infrastructure funds, looking at some emerging valuation trends from the two digital infrastructure funds that have recently listed on the London Stock Exchange.

Global energy and infrastructure – Quarterly valuation update – Q2 2021

Quarterly valuation updateIntroduction

Disclaimer: The general indicative information provided by Mazars and its entities in this document are for general informational purposes only and are subject to further updates. While the information is provided in good faith, Mazars makes no representations or warranties of any kind, express or implied about the completeness, the accuracy, the reliability, the suitability or the availability with respect to the information contained in that document for any purpose. Any reliance placed on this document is therefore strictly at your own risk. This document does not replace formal valuation and advisory services carried out by an independent advisor and, as such, should not be used as a substitute for a formal advice.

3Global energy and infrastructure – Quarterly valuation update – Q2 2021

• Government bond yields are relevant to valuations because they are often used to inform the risk free rate, and also influence the cost of debt.• Since the last quarter, yields have declined marginally across North America, Australia, UK and the Eurozone. The graphs below also indicate a tightening of

bond spreads over the course of the last year; with a clearer trend for sub-investment grade bonds.• In the previous quarterly update, we noted the increasing government bond yields were linked partly to higher inflation expectations. These have not gone away,

but there is continuing widespread debate as to whether higher inflation will prove to be a temporary or longer-term phenomenon. With central banks not yet signalling immediate increases to interest rates, Q2 has not reversed the Q1 trend, but nor has it seen further rises to gilt yields.

The cost of debt has mostly stabilised in Q2 following the increases to gilt yields seen in Q1

Quarterly valuation updateDebt valuation trends

4.76

2.95

-

2.0

4.0

6.0

8.0

Jun-20 Sep-20 Dec-20 Mar-21 Jun-21

USD - 10 Year - All Corporates All In Yields

US Treasury Constant Maturity - 10 Year BB - 10Y - Yield BBB - 10Y - Yield

Yield %

Spread%

3.31

1.50

1.45

3.22

1.84

-

2.0

4.0

6.0


GBP - 10 Year - All Corporates All In Yields

UK Government Debt - 10 Year BB - 10Y - Yield BBB - 10Y - Yield

Yield %

Spread%

2.49

1.10

0.74

4.54

2.75

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0


AUD - 10 Year - All Corporates All In Yields

Australia Government Debt - 10 Year BB - 10Y - Yield BBB - 10Y - Yield

Yield %

Spread%

3.04

1.25

1.50

1.90

1.07

-1.0

-

1.0

2.0

3.0

4.0


EUR - 10 Year - All Corporates All In Yields

Germany Government Debt - 10 Year BB - 10Y - Yield BBB - 10Y - Yield

Yield %

Spread%

2.22

1.39

-0.32

Source: Capital IQ, Mazars analysis


• Q2 has seen a continuation of the share price recovery seen across the sector since the initial falls at the onset of Covid-19

• In our view, higher share prices are linked to a number of real-world valuation trends:

o Higher demand for assets with volume-linked revenues such as toll roads and airports, recovering from Covid-related travel restrictions and curtailed economic activity

o Increased levels of confidence in the forecasts for these assets given evidence over the past year of the impacts of imposing and relaxing Covid-related restrictions

o Continued low cost of debt and track record of successful refinancing transactions (including for assets with volume risk), helping to underpin equity valuations

o Transactional evidence of increased asset pricing for availability-based assets, with downward pressure on required returns linked to scarcity value

• Write-downs introduced at the onset of Covid are therefore being unwound and valuations of lower-risk assets are increasing

• This changing market sentiment was highlighted by the taking-private of John Laing at a price that equated to an implied 35% premium on the stated NAV prior to the announcement in May. As the graph (left) indicates, the weighted average premium to NAV for other listed infrastructure funds is currently above 10%, within the range observed historically (including pre-Covid).

Source: Capital IQ, Reports from Funds, Mazars analysis

Infrastructure funds have indicated that market appetite for assets remains strong and this is pushing up valuations

Quarterly valuation updateEquity valuation trends – infrastructure funds

119.3 120.0

113.8

85

95

105

115

125

135


Shar

e pr

ice

inde

x (D

ec 2

019

= 10

0)

Share price - Infrastructure funds

S&P Global Infrastructure IndexMazars Infra Index - Average Share Price (Market Cap. weighted)Mazars Infra Index - Average Share Price

11.42%

4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%


% P

rem

ium

Share price premium to NAV - Infrastructure funds

Mazars Infra Index - Premium to NAV


5

Quarterly valuation updateInfrastructure assets testing higher valuations; discount rates under pressure for renewable assets

Global energy and infrastructure – Quarterly valuation update – Q2 2021

“..spreads tightening driven by credit improvements was evident across various sectors in the portfolio which resulted in modest uplifts to valuations of the assets where COVID-19 has impacted performance and are still closely monitored by the Investment Adviser. The Investment Adviser expects this trend to persist as economies continue to recover and lockdowns start to ease globally.” - Sequoia Economic Infrastructure Income Fund Limited (NAV update released on 17 May 2021)

“The Investment Manager observed strong competition and downwards pressure on discount rates in the US markets, notably in onsite generation assets, and as a result lowered the discount rates used for the investments in Primary Energy and Northeastern US CHP. Downward pressure was also observed in the Spanish, Swedish and UK markets and a discount reduction was applied to selected investments in these geographies.” - SDCL Energy Efficiency Income Trust plc (Annual Report 2021)


• The graph on the left indicates a roughly flat share price trend in Q2 vs Q1. This follows a period of share price recovery to December 2020 and then subsequent decline in Q1 2021.

• Share prices are nonetheless 25% higher than pre-Covid levels on a weighted average basis.

• Recent share price increases may have been partly linked to improvements in near term power price forecasts across geographies. We would expect this to feed through to revised asset valuations in due course, to the extent not already factored in.

• Last quarter, we noted the long-term decline in share price premium to NAV and suggested that this was partly linked to asset revaluations and the market seeing less potential for upside. This quarter, there has been a marginal recovery in the average premium to NAV level, but still well below previous levels.

In the renewable energy sector, competition and demand have kept the asset valuations high for a while now.

Quarterly valuation updateEquity valuation trends – renewable energy funds

187.6

125.3 120.7

85

135

185

235

285


Shar

e pr

ice

inde

x (D

ec 2

019

= 10

0)

Share price - Yieldcos

S&P Global Clean Energy IndexMazars Yieldcos Index - Average Share Price (Market Cap weighted)Mazars Yieldcos Index - Average Share Price

6.78%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%


% P

rem

ium

Share price premium to NAV - Yieldcos

Mazars Yieldcos Index - Premium to NAV


Source: Capital IQ, Reports from Funds, Mazars analysis


• The digital infra sector covers a range of assets, including fibre-optic networks (subsea and terrestrial), telecom towers, small cell networks and data centres. Similar assets can offer very different investment risk profiles, with potentially significant variations in levels of contracted revenue, counterparty risk and deployment risk

• Private transactions volumes have been robust over the past 12 months, with more than $50bn completed transactions across 44 countries – this compares well to pre-Covid levels

• Q1 2021 saw the launch of two new listed digital infra funds: Cordiant Digital Infrastructure (Feb 2021) and Digital 9 Infrastructure (March 2021). They join a number of listed digital funds in other jurisdictions but are the first listed digital infra funds in the UK

• Generally, the investment strategy of both funds has been to focus on assets at the lower or medium risk end of the spectrum, with a particular emphasis on operating assets and excluding, for instance, early stage fibre broadband companies. Targeted net returns for investors of 9%-10% with dividend yields around 6% implies a risk profile similar to mainstream infrastructure funds.

• As the graph on the left indicates, both funds have seen share price increases since their listings, with trading volumes and implied premia to NAV comparable to other listed infrastructure funds: o Both funds successfully completed additional equity raises in May, adding up

to a combined £350mo CORD’s lower share price to date may be linked partly to reported issues in

converting some of its investment pipeline

Two new listed digital infra funds were launched during the past six months with international investment mandates. Their initial success combined with further fund raising in the sector is a strong sign of investor appetite.

Quarterly valuation updateSpotlight on digital infrastructure funds

EuropeUSD 36.5 bn

North AmericaUSD 14.0 bn

Asia PacificUSD 6.3 bn

Latin America and CaribbeanUSD 1.5 bn

Middle East & Africa

USD 0.5 bn

$59 bn digital infrastructure transactional activity over the past 12 months

114

106

-

2.5

5.0

7.5

10.0

95

100

105

110

115

120

Feb-2021 Mar-2021 Apr-2021 May-2021 Jun-2021

Trad

ing

Volu

mes

(milli

ons)

Shar

e pr

ices

(pen

ce)

Share price and trading volumes - Digital Infrastructure funds

Volume - DGI9 Volume - CORD Share Price - DGI9 Share Price - CORD

Source: Inframation, Mazars analysis


The cost of debt for infrastructure and energy assets remains low despite the increases to Government bond yields seen in Q1, and asset managers have successfully refinanced assets including those with volume risk that were most impacted by Covid-19

The quarter has seen further evidence of increasing valuations across the infrastructure space, with reports of lower discount rates in some sub-sectors and real-world improvements to cashflow forecasts for assets with demand-based revenues

Large-scale capital market fundraising in the digital infrastructure sector, with two new listed funds launched in the UK, is a sign of a growing investment opportunity and is likely to presage more transactional activity and increasing competition for assets

Global energy and infrastructure – Quarterly valuation update – Q2 2021 8

Three key themes from Q2 2021:

Quarterly valuation updateConclusions

Continuing strength in debt markets

Evidence of increasing valuations

Digital infrastructure emerging as a standalone sector in its own right


Appendix 1Information about the Mazars indices

Infrastructure is an increasingly mature asset class, with an increasing number of listed and unlisted fundsset up specifically to invest in and manage real assets across the infrastructure and energy sectors. For thepurpose of our analysis, we have constructed two global indices that focus on listed funds, as follows:

• An index of infrastructure funds, currently including 10 funds with activities across 15 countries

• An index of renewable energy funds, currently including 17 funds with activities across 19 countries

While other infrastructure and energy company indices exist in the public domain, they tend to have a broader scope,including for instance construction companies, transport operators, concessionaires and utilities to gauge broadsentiment across the sector.

By focusing on pure asset owners, the Mazars indices aim to be more closely aligned with market sentiment on thevaluation of these assets. This is reflected in this update and includes a number public statements from funds on howthey are currently approaching their own valuations.

Mazars is an internationally integrated partnership, specialising in audit, accountancy, advisory, tax and legal services*. Operating in over 90 countries and territories around the world, we draw on the expertise of more than 42,000 professionals – 26,000+ in Mazars’ integrated partnership and 16,000+ via the Mazars North America Alliance –to assist clients of all sizes at every stage in their development.*where permitted under applicable country laws.

© Mazars 2021

www.mazars.com

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Ben Morris

Contacts

Julian Macmillan

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Karishma Merchant Isha Gupta

Associate [email protected]

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