Looking for instructive trade-offs

It was one of those funny moments that sometimes occur when you’ve been working on a story for a long time. In the midst of research for our soon-to-be-published deep dive into asset leasing, a Macquarie spokesman explained why the group funds these types of transactions from its specialist asset finance division.

“Although assets are strong, the leasing counterparties are typically not as strong as those for traditional infrastructure assets,” he said. He added that aircraft, for example, required specialist day-to-day management and expertise, and that they were “infrastructure-like” without being pure infrastructure.

That statement was given to us in mid-March. In early May, Dutch pension fund PGGM used its infrastructure fund to acquire a 25 percent stake in Macquarie AirFinance. Stephen Cook, head of transportation finance at Macquarie, described PGGM as the “ideal partner”.

Both parties declined to comment further, which offers a telling example of how people within the same company can hold different opinions on asset leasing.

Asset-leasing investments – and particularly those for aircraft and home-heating and cooling systems – are the latest types of transaction to raise questions about the asset class’s boundaries and the risk/return profile investors want from it.

In a way, the least interesting question about these deals is whether they fit into current definitions of infrastructure. They are certainly infrastructure-like, and many – depending on counterparty strength, contractual length and so on – would easily tick the infrastructure box for many an investor.

As Brandon Freiman, head of North American infrastructure at KKR, told us: “The sector-based approach might say toll roads are infrastructure and aircraft are not because they’re not fixed to the ground. A risk-based approach leads us to not do a toll road that’s 90 percent levered. But a portfolio of diversified aircraft with good counterparties and long-term contracts is infrastructure for us.”

It’s hard to disagree, especially when one looks at the spectacular collapse of overleveraged toll roads across the US – from the Indiana Toll Road to American Roads, with the latter ending in a well-publicised settlement.

No one would deny these roads are infrastructure that provide essential services to the communities they link. And yet, from an institutional point of view, they were not structured to offer some of the key characteristics – such as low volatility – that investors seek from infrastructure. As more and more institutional capital is allocated to the asset class, it will be these characteristics – much more than any ‘fixed-to-the-ground’ puritanism – that will determine what investors consider infrastructure.

It is increasingly clear that even conservative investors are thinking this way. At our recent Tokyo Summit, Yasuhiro Ono, director of private equity and infrastructure at Japan Post Bank, told attendees his institution was looking to go beyond “conventional infrastructure” investments, as long as there is “stable demand and a long-term contract with the offtaker”.

And why not? JPMorgan, in its 2019 Global Alternatives Outlook report, noted the estimated $4.5 trillion in financing that will be needed over the next decade for core-plus transportation assets. As Anurag Agarwal, head of portfolio management at the company’s global transportation group, put it, when these assets derive 90-95 percent of returns from income, compared with 60-70 percent for real estate or core infrastructure, “that suggests that most of your return in core-plus transportation investing can come from contracted income – which is attractive, if you’re focused on yield”.

Of course, that doesn’t mean questions shouldn’t be asked about these infrastructure-like assets. For example, why is a generalist infrastructure GP a better manager of aircraft than a sector specialist? Blanket assertions that these assets are just like core infrastructure also need to be challenged. But it’s hard to ignore the subtle shift in sentiment that appears to be underway.

It will be instructive, nevertheless, to take note of the kinds of trade-offs that investors are willing to make as they venture into some of these new sectors. Through them, an updated definition of infrastructure might slowly take shape, one that is perhaps better suited to a future where assets will look much less like the fixed-to-the ground monopolies of yesteryear.

Write to the author at bruno.a@peimedia.com