Thank you for the excellent commentary received daily! A question for your view - PE industry claims $2trillion "dry powder" available for deployment but can this be LP drawdown commitments which still has to be called & will come from liquidating other investments at current market prices or even defaulting on obligations?

Eoin Treacy's view

Thank you for your kind words. It is the support of subscribers like you that ensures this service persists.

In the aftermath of the credit crisis Blackstone deployed billions in the US housing market and became one of the biggest residential landlords in the country. That action helped put a floor under the market. They correctly concluded the majority of people would not have the resources to save for a down payment and would instead be renters indefinitely.

On this occasion, the housing market has not pulled back yet. With payment holidays being proposed and little tolerance for another foreclosure crisis the opportunities probably lie elsewhere on this occasion.

All signs point towards the infrastructure/utility sector. The majority of dams, power plants and roads in the Western world are old and were never designed to handle the burden they now carry. At the same time, many utilities have been denuded of financial resources by paying out the majority of free cashflow in dividends. They just don’t have the capital on hand to fund massive infrastructure development. Meanwhile, the commercial argument for investing in renewables is improving all the time and it continues to benefit from both political and broad (though often not local) public support.

This article from Bloomberg confirms investments in infrastructure have not slowed down with the drawdown in the wider market amid tightening credit conditions. The logic of locking in long-term cashflows with cheaply coursed funds is a no brainer for long-term investors provided the price paid is reasonable. Many of these assets had been bid up to extravagant valuations before the crash. After 50% haircuts they are now looking more reasonable. However, the primary challenge in ascertaining value is we are one month into a bear market. It’s very early to be thinking about bargain hunting.

The Brookfield Renewable Partners LP price collapsed even faster than it accelerated highs and is now stabilising in the region of the upper side of the underlying six-year range.

Fortress Transportation & Infrastructure Investors LLC invests in transportation and transportation infrastructure assets. Obviously, no one is travelling right now but it’s not like people are never going to travel again. The share is deeply oversold and while the yield (19.85%) is far from secure in the current environment, the company does own income producing assets.

Macquarie Infrastructure Corp focuses on energy infrastructure with gas storage terminals jet refuelling and gas production and distribution in Hawaii. The share collapsed over the last couple of years and is now yielding 23.15%. The fall in energy prices is a significant headwind but the valuations are not excessive and the oil price war will not last indefinitely. The question is whether it will survive the impending default cycle in energy sector.

The big point here is this is the time to maybe nimble at clear value plays but in the full knowledge there are likely to be negative surprises in the coming months as defaults increase. That has not yet begun.