The power of attraction

“There is a fine line between energy and energy infrastructure,” senior vice president of Steven Zucchet said during the second Energy Summit held by Infrastructure Investor on October 2-3 at New York’s Yale Club.

That line shifts slightly between the two, with different investors attributing different definitions. For Borealis, energy infrastructure involves only the assets that distribute energy and the firm is careful to exclude the commodity exposure of the product being delivered.

“Infrastructure assets would have high barriers of entry from other competitors; so, for example, not everyone can be an electricity distributor, but anyone can buy fuel cells,” Zucchet said.

Regardless of the distinction, institutional investors are showing a healthy appetite for energy. For Allstate Investments and for the New York City Retirement System (NYCRS), two limited partnerships (LPs) represented at the summit, one reason for the attraction is due to the fact that these assets are typically linked to inflation, either directly or indirectly.

Energy’s breadth and depth, both on the risk and return spectrum also make the category attractive, according to Michael Albrecht, associate director and head of direct investments in infrastructure at Allstate Investments.

“Historically, Allstate has tended to think about infrastructure as core, long-term contracted assets, regulated pipelines, regulated utilities – and that still represents a large proportion of our infrastructure and real assets portfolio,” he said.

“But what’s evolved over time is we’ve seen a competitive dynamic, return compression and so we have advocated for a more opportunistic approach, looking at shorter-duration contracts that other, similar investors, may not be focused on.”

For NYCRS, which comprises five public pension funds and manages $140 billion in assets, energy infrastructure is “a very good fit for the long-term obligations” of public pension funds, according to the funds’ head of infrastructure investment, Petya Nikolova.

Nikolova also noted that there are a number of new funds – either generalist funds with an energy component to them or niche funds that focus more on a particular aspect of the market – coming to market, a trend she expects will continue, given LPs’ growing appetite for infrastructure.

Yet it is this increase in appetite that has led to return compression, according to Albrecht. “People on the core side of infrastructure are probably seeing similar assets today changing hands at total returns that are 150, 200 basis points lower – at least – compared to 10 years ago,” he said.

Because of this increased competition, Albrecht noted that while there are opportunities throughout the infrastructure spectrum, “there seems to be more opportunities outside of that very core asset profile.”

A 2009 study conducted by the Interstate National Gas Association for America (INGAA) Foundation and ICF International estimated that $133 billion to $210 billion will need to be invested in infrastructure through 2030.

“Many of the plays that are particularly liquids-rich like the Bakken and the Eagle Ford basins lack the infrastructure to facilitate getting the product to the market,” said Vinson & Elkins partner Caroline Blitzer Phillips, who moderated one of the panel discussions and cited the study.

Production will increase

Salim G. Samaha, principal of Global Infrastructure Partners agreed, forecasting that as technology improves, production will continue to increase, making the need for the right infrastructure even more pressing.

“There are opportunities to re-wire some of the infrastructure; for example, converting under-utilised gas lines and converting them for crude oil use,” he said.

But investors need to consider the re-contracting risk. “Supply diversity and reliability are key to utility customers. However, these customers will be very judicious when evaluating the various gas transportation options when their contracts come up for renewal,” he said.

“You really have to sit down and figure out how to re-invent these pipelines to ensure that they continue to be a viable investment.”