About halfway through our conversation, Jim Barry, BlackRock's new head of real assets and leader of BlackRock Infrastructure, drops what he calls “my big mantra”.
“The big challenge in infrastructure equity is there's no common language of equity risk. You put 20 investors in a room and ask them to define core [infrastructure] and you get 20 different definitions. Most people, when they talk infrastructure, use the language of low risk – the language of core. But I see balance sheets going directly and managers bleeding up the risk curve and that's driving CIOs [chief investment officers] nuts. The challenge is people talking the language of low risk and then going up the risk spectrum.”
Barry is big on language, although there is nothing in his CV – Bachelor of Commerce from University College Cork; Harvard Business School MBA – to indicate where this love of it comes from. Nevertheless, his spot-on assessment of one of the big problems at the heart of today's infrastructure market is, essentially, a linguistic challenge.
Partly because of how new the asset class is, partly because different factions are still competing to write the narrative on what a good infrastructure strategy looks like, limited partners (LPs) and general partners (GPs) are often not speaking the same language – and that is leaving a lot of “bad taste in the mouths of lots of institutions”, Barry adds.
THE REAL ASSETS CONVERSATION
This instinctive grasp of the importance of speaking the same language as your customer is one of the key reasons behind the birth of BlackRock's new real assets unit, which is combining its infrastructure and real estate platform – headed by Marcus Sperber – under a single umbrella.
“BlackRock has very holistic relationships with its client base and what we have begun to see, especially at CIO level, is that conversations are happening around the real assets category, as opposed to the particular silos of infrastructure and real estate,” Barry recalls. “I don't think it's been this mass movement, where suddenly you have a real assets executive buying real assets broadly. I think what you're beginning to see on the client side is real assets becoming an allocation as a category before it ever gets split into its component parts.”
For BlackRock, its newly established real assets unit is its way of getting in early on that conversation. “We are responding to that dynamic,” Barry explains, “because if your customers are going to be buying that way then you need to be able to talk to them in those terms.”
It is also a way for BlackRock to offer more comprehensive solutions. “There is an increasing institutional desire for a solution offer instead of just a product pitch. So we are looking at the overall portfolio to be able to give very outcome-focused solutions to clients. I think that's really important because that's how a CIO thinks: 'What do I want out of this allocation in terms of risk factor exposure and investment return?'
“In a real assets context, CIOs want true diversification and a lack of correlation with their existing portfolio. Again, that's something we feel we can talk about in the language of the balance of the portfolio more easily than others,” Barry argues.
The main reason for that, he explains, is BlackRock's Aladdin platform, which combines sophisticated risk analytics with comprehensive portfolio management tools to better inform investment decisions. Better information helps BlackRock and its clients understand the risks of a potential investment and how those risks fit within a broader portfolio.
“Where I see the big game for us is that we will have these individual strategies in infrastructure and real estate, but we can package them, with third-party offerings, in a way that gives clients outcomes that are very focused on their needs as an institution,” the new real assets head says.
But BlackRock's foray into real assets is also a strategic decision. Alternative assets are a big part of BlackRock's business and in looking for ways to grow its alternatives footprint, the asset manager hit upon real assets as a key strategic priority.
“Combining our real estate and infrastructure units creates critical mass – a global business with $29 billion in assets and 320 people – which will make us more effective at growing the business. On the investment side, someone who underwrites a commercial building is not suddenly going to start underwriting a wind farm, so those teams will remain substantially discrete. The area where we will see absolute integration is in the operating platform,” Barry says.
That means that product strategy and structuring, fundraising, marketing, investor relations, business operations and finances as well as research are ripe for closer co-operation, he states.
What will not change is how BlackRock decides on what markets to expand into next. “What's sha-ped our growth in infrastructure is that we never felt we had to be a jack of all trades. We are very thoughtful where we go to play. Are there structural shifts creating a flow of addressable investment opportunities that are relevant to our clients? If that's the case, then we go after them with teams with deep sector expertise. And we might acquire businesses to do that, as we did in infrastructure with I Cuadrada.”
So what might be next for BlackRock's new real assets unit, then? “I have a view on timber and forestry. I think COP21 and the tailwinds for that will drive value into forestry from a carbon mitigating perspective. I also think the dynamics around agriculture and food sustainability will play out in a way that potentially creates addressable opportunities,” Barry answers.
The acquisition of Mexico's Infraestructura Institucional (also known as I Cuadrada) was the highlight of BlackRock Infrastructure's activities in 2015. With one stroke, the asset manager added roughly $1 billion in assets under management to its books via two CKD funds backed by local institutional capital, not to mention a portfolio loaded with transportation and social infrastructure assets.
For the uninitiated, CRDs, or development capital certificates, are listed structures that allow institutional investors to funnel capital to infrastructure and private equity-type investments.
More importantly, I Cuadrada instantly bolstered BlackRock Infrastructure's Mexican presence, which had already started strongly last year when it partnered with First Reserve to buy a 45 percent, $900 million stake in the Los Ramones II project from state-owned oil and gas company PEMEX.
And, of course, the acquisition also gives BlackRock a great infrastructure platform to take on Spanish-speaking Latin America. Let's not forget, BlackRock was already Mexico's second-largest asset manager, with a team of 30 people, now bolstered by the I Cuadrada personnel. That not only gives it an enviable number of boots on the ground to chase Mexican infrastructure deals, it also sets the stage nicely for it to target Colombia, Chile and Peru, BlackRock Infrastructure's next target markets, according to Barry.
What is also interesting about BlackRock's Latin American infrastructure move is how reminiscent it is of the birth of the asset manager's infrastructure unit. In 2011, BlackRock did not have an infra-structure business, so it went out and partnered with Barry's NTR; in 2015, it bought I Cuadrada to gain a strong foothold in what it sees as its next infrastructure growth market.
That makes Barry a man who is very much in the business of building infrastructure businesses. After all, NTR started life as a toll road operator before transforming itself into a renewables powerhouse.
“BlackRock – very much an alpha/beta house then – was getting used to illiquids and was very pleased with what they saw in terms of the growth and penetration of renewables. On the back of that, BlackRock encouraged the NTR team to think about other infrastructure areas and debt was our next move,” remembers Barry.
What started as an idea in 2012 has grown into a $4.5 billion chunk of BlackRock Infrastructure's $8.6 billion of assets under management, stretching across North America, Europe, Asia and, this year, Latin America also. As usual, it was prompted by a structural shift – banks pulling back from the project finance market; institutions looking for incremental yield – and the opportunity that created.
Much the same applies to Mexico. “The structural shift there was constitutional reform that was creating an addressable opportunity for foreign direct investment in the energy space. That led to Los Ramones, hiring some key executives and the acquisition of I Cuadrada,” Barry explains.
The BlackRock infrastructure boss has high praise for I Cuadrada – “they have a strength of process that would put most developed market managers to shame” – and confidence in Mexico's reforms and infrastructure plans. But it is when you hear him talk about how to mitigate risk when entering a new market that the acquisition of I Cuadrada really shines.
“I have a very narrow view of risk and I would say most emerging market investments shouldn't be in an infrastructure portfolio – they should be in a private equity portfolio. So as we thought of a market like Mexico, one of the key things for me was to mitigate regulatory and policy risk. In my mind, that meant pairing international with local capital – and a particular type of local capital at that,” Barry explains.
He is referring, of course, to the Afores, the privatised compulsory pensions that every Mexican employee has to contribute to and which are invested in I Cuadrada's two CKD funds.
“It's one thing for a government to make a decision that will impact an investor sitting 3,000 miles away – it's another to make a decision that affects people that can vote them out in the next election. It's not always as perfect as that, but certainly the idea of having local capital co-investing with foreign capital was a key risk mitigating strategy for us,” he concludes.
Mexico also allows BlackRock to fulfil another strategic aspiration: to broaden its traditional energy footprint. “It's true that Mexico offers lots of opportunities in pipelines and power generation. It's also true that Mexico, like the US, has a larger share of energy opportunities compared to other markets like Europe,” Barry admits.
However, that does not mean BlackRock Infrastructure is turning its back on where it all began.
“Strategically, renewables are interesting to us. We now have 23 investment professionals and that's just on the investment side – then there's this whole operating platform that sits behind it. I don't think there's any other team like it in the world. We have a footprint in Europe, the US and soon Latin America and Asia over the next 18 months,” Barry says.
If infrastructure debt makes up the lion's share of BlackRock's infrastructure assets, renewable energy, especially prior to the I Cuadrada acquisition, was right behind it at $2 billion under management.
“With that capability, we are now thinking about product strategy. The old strategy where you have one team raising one fund separately – that's not our model. The model is: here's the capability, we see focused opportunities, so how can we shape this into products that are relevant to our client base?” asks Barry.
In many ways, BlackRock's renewable funds are the perfect illustration of its laser-focused approach to creating products that do what they say on the tin.
“As the market has become more attractive, we've seen additional capital compress yields,” Barry says. The BlackRock Infrastructure head reckons gross returns in the renewables market have compressed by about 200 basis points in recent years. That could have prompted Barry's team to change the risk profile of their renewable energy products. But while Barry admits BlackRock Infrastructure might be open to creating a higher risk renewable energy product, it's clear where he places the renewable opportunity along the risk spectrum.
“Renewables comprise about 20 percent of the global addressable infrastructure market. But if you actually look at the low-risk end of infrastructure – PPPs, transmission distribution, availability-based transportation – then renewables makes up perhaps as much as 30 or 40 percent of the low-risk end,” he offers.
As an industry veteran, though, what really excites Barry is renewable energy's new-found position. “The thing most people seemed to have missed about renewables is that they are now cheap. The US, for example, is not just sitting on the cheapest natural gas in the world, it's also sitting on the cheapest renewables in the world, because they have the resource and the land.
“At the same time, utilities are making a portfolio decision, making sure they have variable price energy, like gas, in the mix alongside fixed price energy like wind and solar. Renewables are not this nice subsidised play – they are mainstream,” Barry states.
Mainstream: much like the rest of the infrastructure asset class, really. Barry may quibble about infrastructure's lack of a “common language of equity risk”, but he is in no doubt about the asset classes' potential, even in a new world of higher interest rates.
“Institutions came for the yield, but they will stay for the diversification.”