Adebayo Ogunlesi, the question of where to invest is just as compelling as the question of what to invest in.
In March, ‘Bayo’ gave a lively chat at Infrastructure Investor’s Berlin Summit. In front of a capacity crowd, the chief of $15 billion colossus Global Infrastructure Partners (GIP) left no room for misinterpretation: if it isn’t transportation, midstream services, or pertaining to waste or water management, then there’s little likelihood GIP will buy it.
But Ogunlesi – formerly a rainmaker who headed investment banking for Credit Suisse before starting GIP in 2006 – didn’t stop there. Geographically, he told the audience, his firm had its off-limit investments as well.
For one, GIP wouldn’t be interested in infrastructure in Asia. Not only that, but Ogunlesi seemed content to avoid emerging markets altogether.
“GIP is focused on the developed world,” like Europe, North America and Australia, he affirmed.
Berlin is a fitting place to talk infrastructure. The city is open, outward-looking, not to mention the capital of a core OECD country. OECD (Organization for Economic Cooperation and Development) members are democracies dedicated to a market economy.
Significantly for the asset class, OECD nations are also a salient point of contention in the debate to define infrastructure investing in discussions with limited partners (LPs).
“The thing is, divorce geography, and investors are focused on brownfield projects, like a toll road that’s already built, or airport. Investors don’t like greenfield,” says Kelly DePonte.
For DePonte, a partner at placement agent Probitas Partners, LPs’ preference for ‘brownfield’ public-private partnerships (PPPs; P3s) involving existing infrastructure, instead of ‘greenfield,’ start-from-scratch undertakings, is a no-brainer.
“There’s less risk in brownfield,” he states.
Now, reintroduce geography into that equation. For non-OECD countries, a rail, road, or bridge, is usually a first-of-its-kind project – a greenfield project, in other words. Accept the logic that less risk is better, and the onus is on general partners (GPs) to pursue brownfield PPPs.
And to find them, GPs turn to OECD countries.
“That’s why the emerging markets have never been a large part of the P3 market,” DePonte asserts.
But in order to fully understand the rationale feeding OECD favouritism, Markus Hottenrott points to the behaviour of infrastructure assets in institutional portfolios.
For the last seven years, Hottenrott has helped mould Morgan Stanley Infrastructure (MSI) into a multi-billion-dollar enterprise. Installed as chief investment officer of MSI in late 2011, he’s cool on greenfield PPPs – not as bricks-and-mortar possessions, but as financial instruments.
“The reality is, a lot of investors simply want investments at the conservative end of the risk spectrum of the infrastructure asset class,” he says. “Many LPs are happy with the returns from such infrastructure assets.”
Now global head of MSI, Hottenrott calls greenfield, emerging market P3s “interesting,” but also high-risk, high-return investments closer to “private equity…with little to do with infrastructure characteristics from an asset-liability management perspective”.
“Brownfield infrastructure is long-term, highly predictable and cash generative from the start,” Hottenrott explains. “Greenfield projects, in some cases, need a number of years before becoming operational and generating cash.”
Regardless, even the staunchest OECD proponents have nothing but praise to dole out to Meridiam Infrastructure.
With reason: greenfield expert Meridiam has gobbled up commitments from US LPs, such as CalSTRS (California State Teachers Retirement System) and Maine Public Employees Retirement System (MainePERS) with ease.
“To connect the OECD with ‘no greenfield’ is an overstatement,” says Joe Aiello, a Meridiam partner overseeing North America.
“LPs have a broad mandate for returns and greenfield has become understood,” he says. “Just because someone pulled back from non-OECD doesn’t prejudice opinions on brownfield and greenfield.”