Tue 08 Aug 2023
Welcome to the Q2 2023 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 indices of listed infrastructure funds and listed renewable energy funds, compiled on the basis set out in Appendix 1 to this update.
In addition, this quarter we have included a spotlight on how debt impacts on equity valuations in the sector. Although traditional valuation theory links higher debt to more risk and therefore a higher cost of equity, the approach in infrastructure valuations needs to be more nuanced than this.
Three key themes from Q2 2023
The cost of debt has settled in a new range, and asset owners are having to adapt to this. Long-dated gilt yields indicated a relatively stable trend over the past quarter, which therefore crystallises the rising yields experienced in H2 2022. Private debt transactions are still taking place, but asset owners are having to accept the higher cost.
This is starting to feed into the cost of equity despite continuing high competition for assets. Strong competition for energy and infrastructure assets has limited the extent of increases on asset discount rates to date. But the capital markets are expecting more to come and transactional trends are starting to bear this out.
When analysing the impact of debt on equity valuations, a nuanced approach is essential. The introduction of debt is likely to increase risks to equity investors and therefore the required equity discount rates. But these risks need to be analysed as part of a broader market benchmarking exercise.
Download our quarterly valuation update for Q2 2023