Q: What is the role of infrastructure in MEAG’s investment portfolio, and how is infrastructure performing against other asset classes?
FA: MEAG decided to start investing in infrastructure in 2007 and initially made commitments to a number of infrastructure funds to further diversify its alternative asset base. Stable and attractive returns, lower volatility compared with public markets and the long-term investment horizon of the asset class were key decision drivers when launching our direct investment activities a few years later.
Since then, MEAG has become a successful investor in infrastructure and manages a diversified portfolio of core infrastructure as well as renewable energy assets. Being part of one of the world’s largest insurance company groups, MEAG pursues investment opportunities in OECD countries and benefits from the group’s international network. Furthermore, our internal technical,environmental and insurance expertise offers a big advantage in the assessment of new infrastructure transactions.
We clearly define ourselves as a long-term investor capable of making both equity and debt infrastructure investments. Our key investment areas are transportation, conventional and renewable energy production, midstream, telecommunication and social infrastructure.
Q:What are your views on the current investment climate for the infrastructure asset class, both globally and in Europe?
FA: Infrastructure has become a very attractive but also competitive asset class in recent years. Deal flow has grown constantly, both in terms of number and aggregate deal size, and the market has matured significantly. Today, investors can select from a large variety of different asset types, investment styles, geographies, maturities and business models. Furthermore, the attractiveness of infrastructure is closely linked to the current low-interest environment and the resilience that the asset class proved during the financial crisis.
However, these advantages attract a lot of investors and have made the landscape more competitive. We are seeing even more capital flowing into the market, while good deal flow remains rather stable. This is especially true for Western Europe, which is seen as a safe haven for investments by the large majority of infrastructure investors.
It should be noted that infrastructure is not a risk-free asset class. Political and regulatory risks remain key concerns, both from the investment and asset management perspective. As experience has shown, key attractions for investing in infrastructure can change into unpredictable risks, even retroactively.
Q: Direct investment, co-investment, separate accounts, pooled funds (listed and unlisted) or others – what is your preference?
FA: We started our infrastructure activities by making fund investments, in order to build up exposure to a variety of assets in different geographies within a reasonable timeframe. Over time, we developed our own direct investment strategy and set up dedicated teams to cover the entire range of investment opportunities in the market.
Today, our mandate involves executing direct and co-investments, and we may back infrastructure funds only if they offer a very specific edge and give us a competitive advantage. We usually team up with like-minded investors to ensure full alignment of interests and best portfolio management practices.
Q: In 2013, according to Infrastructure Investor Research & Analytics, $7.2 billion was raised by Europe-focused unlisted infrastructure funds, soaring from $2.7 billion in 2012. Do you see more competition and higher valuations in deals? If so, will it affect your future strategies?
FA: We are definitely seeing an increasingly competitive infrastructure landscape, as the investor universe has expanded significantly in recent years, new players are entering the market and existing investors are increasing their allocations.
Furthermore, the infrastructure fund model has survived the financial crisis, and combined with lessons learned from the past, even emerged from it stronger. As a consequence, infrastructure funds attract significant amounts of capital.
Additional competition arises from large sovereign wealth funds (SWFs), superannuation schemes, insurance companies as well as public and private pension funds, which have experienced teams, large pools of capital and very often competitive costs of capital.
Sellers of assets are aware of the situation and try to maximise prices by increasingly conducting competitive auction processes. These have even become standard when disposing of large regulated brownfield assets and allow investors to deploy significant investment amounts. This is where we currently observe the highest level of competition in the market.
Current valuations tend to follow these trends and are further driven by the imbalance between capital supply and the availability of sufficient high quality deal flow, as well as by the availability of debt. This doesn’t necessarily mean that the overall market is overheated, but investors need to be increasingly prudent with their valuations and disciplines to ensure the creation of sustainable financing structures.
Q: Do you think infrastructure debt investment is a rising trend?
FA: Although supply has rallied recently, the infrastructure debt market still shows a dislocation, due to the deleveraging pressure among banks for regulatory reasons and budgetary restrictions on government spending. Hence, the traditional supply of infrastructure debt from banks is now exhibiting lower volumes than it did before the financial crisis, whereas the need for additional financing continues to grow.
This market dislocation offers institutional investors and dedicated debt funds a new opportunity to bridge the financing gap and benefit from the characteristics of infrastructure investing, such as stable and predictable cash flows, income early in the life of the investment, investment grade ratings, low correlation with traditional asset classes and partially inflation-linked yield structures. These features usually apply to the financing of mature infrastructure assets.
However, investors need to be aware that exposure to infrastructure debt means taking on a new set of risks and giving up a certain amount of liquidity. Due to the long-term nature of most infrastructure projects, and the limited secondary market, investments are intended to be held until maturity. Further, infrastructure debt investments often require considerable expertise to originate and structure deals, and the performance of the assets has to be monitored on an ongoing basis after their acquisition.
Due to the fact that the need for new and replacement of existing infrastructure continues to grow globally, we firmly believe that infrastructure debt is a rising trend. MEAG has therefore decided to launch a dedicated infrastructure debt investment programme in addition to its existing equity investment activities.
Q: How do you see opportunities in other regions, especially in emerging markets?
FA: Industrial and urban growth in emerging markets has led to unprecedented investment plans in infrastructure. This creates great opportunities for infrastructure operators, engineering and construction companies, as well as for banks and financial institutions that already make significant investments in these economies.
Higher risk/return characteristics of emerging market opportunities compared with the more stable and predictable Western market transactions are attracting a growing number of infrastructure investors, which are also trying to achieve geographic and strategic diversification within their portfolios. Under current market conditions, Asia is the most commonly targeted region for investments within emerging markets, followed by Latin America and Africa.
However, investors need to factor the inherent risks of these markets into their investment considerations, such as the reliability of the political and legal environment, volatility of gross domestic product (GDP), exposure to foreign exchange (FX) and potential reputational issues related to frequently softer compliance with environmental, social and governance (ESG) standards.
Although we expect to see continuous ups and downs in these economies, emerging markets will definitely mature over time and become an attractive market place with very interesting investment opportunities.
Q: Will any specific sectors and destinations interest you in the next 12 months?
FA: We will continue to screen all relevant sectors of the market thoroughly and try to identify the most suitable deal flow for our investment programmes. As we need to match liabilities in a large variety of currencies, it is our clear intention to further concentrate on non-euro denominated assets, especially in the US and other regions in the world.
Frank Amberg is head of private equity & infrastructure at MEAG (Munich Re Group) in Munich.