Publish Date

Jan 20, 2020

Was 2019 a Turning Point for the Flow of Infrastructure Capital into the U.K. or Merely a Blip?

Tax Insights

After leading the way as the primary home for brownfield infrastructure investors capital for much of the last ten years, a sharp reduction in U.K. transactions in 2019 drove a decrease in European volumes for the first time in five years. This, despite wider European activity remaining broadly stable.

Whilst U.K. transactions have fallen as a proportion of overall European transactions since 2015, the total U.K. activity remained broadly consistent through 2018, with the change driven by more capital allocated to, and transactions in, Europe as infrastructure allocations grew.

Of the 267 European brownfield transactions in 2015, 141 (53%) were in the U.K. compared to 147 (32%) of the 459 transactions in 2018 (Source: Infranews Transaction database: Europe, Brownfield as at 2 January 2019). However, in 2019 only 96 transactions were completed in the U.K., a drop of 35% with the U.K. accounting for 24% of the 405 European transactions.

Was 2019 a turning point for the flow of infrastructure capital into the U.K. or merely a blip?
In many respects, 2015-2018 were stellar years for U.K. infrastructure driven by:

  • The maturity and exit of many “Fund 1s”, which were heavily weighted towards the U.K.
  • Opportunistic disposals (to demonstrate a track record) as investors took to the market to raise funds 2,3 and 4).
  • Continuing primary transactions as funds took advantage of market conditions.
  • Continued growth in infrastructure equity allocations.

Together these factors maintained a robust level of U.K. brownfield infrastructure transaction activity, a Brexit blip aside in the run up to, and immediate aftermath of, the 2016 referendum.

Undoubtedly 2019 has been a year plagued by uncertainty in the U.K. which has influenced the mindset of investors and impacted the level of U.K. brownfield infrastructure transaction activity:

  • Brexit stalemate, clearly influenced “Go-No-Go” disposal decisions around the initial 31 March 2019 deadline and acted as a drag on successful transactions in Q3 as the next 31 October 2019 “false” deadline loomed.
  • Whilst there was some recovery in activity in Q4, further malaise and negative sentiment was experienced as we approached the General Election on 12 December due to the “Corbyn risk” and particularly the threat of renationalisation of water, energy and rail at below market value which, coupled with:

(i) signalling of a more aggressive stance anticipated from Ofwat in its AMP 7.

(ii) the Corbyn “free broadband for all” Manifesto promise

sent investors in water running for the hills and stopped fibre transactions in their tracks respectively; and

  • Investors have recognised being overweight in GBP assets and refocussed attention on unlocking value in North-Western Europe with fibre, district heating and telco towers being particularly active during 2019.

What perhaps is most surprising, given the level of uncertainty, is that U.K. infrastructure investment maintained the level of activity it did with 96 deals (35% down on 2018). For the canny Euro or Dollar investors, U.K. assets have potentially represented good value due to the depreciation of sterling against both currencies since the Brexit referendum, countering the “negative” outlook.

What’s the outlook for 2020?  

Clearly the decisive result in the General Election:

  • Provides some certainty that we will “Get Brexit Done” with the withdrawal bill already moving through the Commons.
  • Removes the threat of Nationalisation for the foreseeable future.

There does, however, remain a no-deal Brexit risk, with a new empowered Prime Minister inserting a clause into the Withdrawal Agreement to conclude trade negotiations by 31 December 2020 and rule out any extension to the Transition Period.

Here are our top five predictions for 2020:

(1) A lower absolute level of closed end fund disposals will continue to dampen U.K. secondary infrastructure transactions. 

Fewer funds have < 3-year maturities than has been the case in recent years which, coupled with a number of opportunistic early disposals from those that do in 2018 and prior, reduces the number of assets remaining to transact.