Fund managers made fewer real asset acquisitions in Europe between Jan. 1 and March 23, 2020, than a year earlier, amid the onset of the coronavirus pandemic.

Listed and unlisted fund managers announced a combined 247 deals worth an aggregate disclosed transaction value of €12.74 billion during the period, down from 315 deals worth a combined €13.86 billion a year earlier, according to S&P Global Market Intelligence data. The dip also follows a quarter high during the final three months of 2019, when 359 deals valued at a combined €23.73 billion were announced.

Attractive assets

Over the past few years, "a lot" of fund manager capital has been deployed into real asset opportunities "fueled by the search for yield, low-interest-rate environment, the need for greater portfolio diversification, global monetary easing, and so on," MJ Hudson Managing Director and Head of Research Joanne Job said.

The "mega theme" in the real assets market, Job said, is the increase in renewables deals alongside the transition away from fossil fuels and carbon-heavy infrastructure.

Dealmaking in traditional energy assets is now challenging for investors, Toby Parkinson, a corporate partner at Clifford Chance who has a particular focus on infrastructure, said, especially given the increasing focus limited partners are placing on Environmental, Social, and Governance strategies. New subsectors within renewables such as district heating and smart metering are attracting attention from investors, Parkinson added.

Digital infrastructure is another hot area for investment due to growing demand for connectivity, and the introduction of 5G has driven up investor appetite for deals in this space.

Pandemic impact

But the uncertainty created by the coronavirus pandemic has hit some sectors under the real assets umbrella. The aviation industry is the most obvious of those affected, Stavros Siokos, co-founder of real assets coinvestment firm Astarte Capital Partners said. Hospitality investments, from cruise ships to hotels, will also struggle, as will some real estate investments such as those related to co-living, Siokos added.

Conversely, assets such as transport and distribution from shipping and logistics centers will be in demand following the pandemic as international demand for resources resumes, Siokos said. Healthcare assets will also be attractive as people realize there are deep shortages across the board. With governments currently pouring cash into stimulus packages, Siokos also expects there will be demand for private capital to assist infrastructure projects once the crisis is over.

For now, fund managers have turned their attention from deal making to their portfolio companies, and it is too early to assess the medium- to long-term impact on assets or activity levels, Clifford Chance's Parkinson said. But unlike other recent downturns, there is no systemic risk. "Governments are intervening in the markets to stabilize them. The workout dynamics will also, therefore, be different," he added.

Private equity firms broaden horizons

For private equity firms, real asset deal activity between Jan. 1 and March 23, 2020 also dipped on previous quarters. A total 37 European real asset acquisitions were announced during the period, down from 73 in the fourth quarter of 2019 and seven fewer than in the first quarter of 2019, according to S&P Global Market Intelligence data.

Private equity fund managers have increasingly focused on European real assets in recent years, with infrastructure assets topping their buy lists.

"Over the past five years there has been a real trend towards private equity houses diversifying into infrastructure with the likes of Carlyle Group Inc. , The Blackstone Group Inc., TPG Capital LP, KKR & Co. Inc. and EQT AB (publ) all now having dedicated infrastructure funds," Clifford Chance's Parkinson said.

The lines between private equity and infrastructure investments in particular have blurred, MJ Hudson's Job said. Private equity firms with large amounts of dry powder have looked for ways to deploy capital in a competitive market marked by high valuations across the past five years. "The competition for deals is very tight, yields are squeezed. They are branching out into other areas, such as infrastructure, where they think they can find good deals. And obviously, there are commonalities. It's not like they're completely different industries," she said.

Private equity firms with infrastructure strategies take a different approach to traditional infrastructure investors, Parkinson said. "While focused on deploying capital, they are also focused on adding value – transforming or developing companies by investing in growth, improving efficiency and de-risking businesses. It is more operationally focused. They are focused on the same traditional sectors but also pursue buy-and-build strategies."

Some of the largest announced real asset deals struck by private equity firms in 2019 through to the end of the first quarter of 2020 include Lone Star Funds' acquisition of BASF SE's construction chemicals business for €3.17 billion, Advent International Corp.'s €3 billion acquisition of Evonik Industries AG's Methacrylates business, and Blackstone's acquisition of CRH PLC's Europe distribution business for €1.69 billion gross, according to S&P Global Market Intelligence data.