Q: Roughly two years have passed since you left JPMorgan to establish Mark Weisdorf Associates (MWA). What was your motivation for doing so?
MW: I re-established MWA to pursue other opportunities in infrastructure. What I’ve always loved to do, and what I’ve done four times over the past 20 years, is identify opportunities for institutional investors to generate attractive risk-adjusted returns, and designed strategies to execute on those opportunities.
We did that successfully at JPMorgan in the OECD core space, the Asian opportunistic space and in project finance loans. However, there were institutional investors interested in additional strategies: Africa, Latin America, renewables, mezzanine debt. Others are interested in ‘value-added’ strategies that have a mid-risk profile, seeking returns in the low- to mid-teens. I saw opportunities to develop and implement strategies in those areas.
It was really that simple, very amicable, with a long handover period, and to the extent that I speak to institutional investors interested in strategies that JPMorgan offers, I refer them to JPMorgan because we’re pursuing different strategies.
Q: You began establishing the infrastructure investments group at JPMorgan in 2005. Did you face the same challenges when establishing your own firm nearly a decade later?
MW: In some ways, yes. In terms of establishing a new strategy and a new team, that’s similar. The differences though are two-fold. The first is that establishing a firm affiliated with a bank is different than establishing an independent firm. Banks have come under a huge amount of scrutiny and additional regulation, which really has little to do with their investment management businesses, but nonetheless, continues to have an impact on how they can execute on investment strategies.
The other thing that’s different of course, is the economic and financial environment around the globe today compared to 2005. So, I’d say there’s a similarity at the micro-level, in terms of the challenges of articulating and designing a strategy, formulating a business plan, hiring people and executing that strategy. That’s pretty much the same, but the environment has changed quite a bit in terms of whether you work within a bank or independently. And of course the overall economic and financial climate has changed.
Q: When you spoke to Infrastructure Investor in the latter half of 2014, you said that it was a good time to launch a new business and that opportunities in the space were greater than they had been at any other time since the global financial crisis. Did you find that to be the case?
MW: Absolutely. Look at fundraising in the last two years, the amount of money that institutional investors have committed to infrastructure; that managers have raised. There have been new managers that have launched and been successful and they’ve been productively and prudently putting money to work. So, yes, absolutely.
Q: Do you think that’s still the case today?
MW: Yes, I do.
Q: But aren’t investors often complaining nowadays that there is too much competition, valuations are high and returns are compressed?
MW: That’s a complaint that’s been around since people began investing in infrastructure. But I look across to private equity, and the number of GPs and amount of money allocated to private equity is 10 times, if not more, than what has been allocated to infrastructure.
I look across to real estate and, how many real estate managers are there? How much money has been invested in real estate? And what’s been happening to real estate prices – institutionally investable real estate? So, yes there’s competition; yes, the money allocated to infrastructure is growing, but on a relative basis, infrastructure remains attractive.
I’ve gone on record in the past to say that within 20 years, infrastructure allocation and investment from pension plans, insurance companies and sovereign wealth funds will equal real estate. We’re one-tenth, or less, of where real estate is today.
Now, if everybody tries to invest all the money that’s been raised this year within the next 12 months, then yes, valuations will climb and returns will shrink further. But things go in cycles and GPs have to maintain discipline. Still, returns on core infrastructure are higher than the returns on core real estate. Think about that.
Frankly, I don’t buy the argument and we’re seeing opportunities that are not yet being taken advantage of by institutional investors.
Q: What kind of opportunities?
MW: We see opportunities in the small- to mid-cap, value-added area targeting low- to mid-teens returns, and that’s been our strategy in the US. We’ve looked at many, and pursued seriously about a dozen investments with a $4 billion aggregate enterprise value. They’ve included opportunities in gas-powered electricity generation, aimed at replacing coal-fired generation that is being retired in the US. We’ve looked at a number of regulated gas distribution utilities. With the price of gas so low, there’s an opportunity to build out more gas distribution to parts of the US still using heating oil or propane, which are more expensive heating fuels.
Another area of focus has been renewables. Wind and solar generation have low penetration in the US, but the cost of these technologies is declining while efficiency is increasing, making solar and wind cost competitive with gas and other types of electricity generation in many parts of the US. Also, the extension of the US renewables tax credit regime has resulted in some developers wanting to become operators.
Earlier this year, we facilitated a $100 million investment in a US developer and operator of solar farms across eight states. Their strategy is to grow, so that by 2020 the company will be generating 1GW of electricity across a dozen states. By then, the company could have an enterprise value of over $2 billion, with $1 billion in equity – a significant increase from its current enterprise and equity value.
Electricity generation and transmission – particularly renewables – in emerging markets is even more attractive, given the significant gap between demand and supply of electricity, and the substantial positive impact on GDP and living standards in developing countries. We are also seeing corporations and governments in both developed and developing countries beginning to re-allocate capital by selling certain operating infrastructure assets to core/core plus investors and redeploying capital to the development and construction of new strategic infrastructure assets, with increasing institutional investor interest in partnering on such opportunities.
There are two aspects to what MWA does. One is pursuing investment opportunities that fit certain strategies, in North America and emerging markets – mainly the US, because the US is the largest economy in the world. It’s also where institutional investors – both US and non-US – are the most underweight in infrastructure.
We’ve also been working with both institutional investors and investment management firms, who either aren’t in infrastructure – maybe they’re in real estate, private equity or other real assets – or wish to evolve what they do in infrastructure. We work with them to determine how they might build an optimal infrastructure investment strategy or portfolio to take advantages of opportunities in private markets.
Q: How many people comprise the MWA team?
MW: It ranges from three to eight people depending on the project. The person who has been with me for the past two years is Juliet Wallace.
Juliet has over 25 years’ experience working in London, Tokyo and New York mainly in power and other infrastructure in developed and developing markets at Denham Capital, Fieldstone and Dexia, including private equity investing, M&A and debt advisory, as well as project finance. Stephane Azoulay, now at Evercore, and Johann Rayappu, now at Blackrock, worked together at Macquarie for over 10 years, and were colleagues at MWA in 2014 and 2015. Then we have a number of other very capable people in our networks, experienced in specific industries or geographic regions who work with us on a project-by-project basis.
Q: Other investment managers we’ve spoken to who choose to focus on the US energy sector have pointed to the fact that the sector is one with a history of private investment, resulting in greater acceptance of private capital. Do you see any other infrastructure sub-sector that might be on the verge of that level of acceptance?
MW: I think that the transportation sector will generate substantial opportunity in the US and the water and wastewater sector shows a lot of promise as well.
Traditionally, these have been the bailiwick of municipal bonds. There have been a few PPPs, such as the Port of Miami Tunnel, the I-595 toll road, the LaGuardia redevelopment project currently under way, but it’s been very little and sporadic. What I believe is happening now, however, is that the continued build-up of deferred maintenance and the need for new infrastructure in transportation and water, combined with the significant increase in US government debt and the growing experience that states, municipalities and the federal government are gaining with respect to PPPs, will lead to significant opportunity in these sectors.
I do believe the logjam will break. It’s not going to be a steady, linear growth, I think it’s going to be exponential. So, I would say, ‘watch this space’ because I think there’s a very strong possibility that things will get much more active in 2017.
Q: Speaking of 2017, a new president will be in the White House. In terms of infrastructure investment, do you think it makes a difference if Hillary Clinton or Donald Trump is in office?
MW: I do, and the other thing that will make a difference is who will have the majority in the House and Senate. Co-operation between Congress and the president is required for infrastructure programmes to be successfully implemented. The president can’t do it alone.
It also requires co-operation between the states, municipalities and the federal government, because infrastructure, particularly in the US, is a local grassroots issue. It requires determining the needs of hundreds of municipalities in each state, and then prioritising those needs across a country with 50 states and five territories.
Who wins will make a difference even though the policies of both presidential candidates are pro-infrastructure. I think the challenge with Trump is that it’s not clear that the Republican Party is in support of his candidacy. He’s also inconsistent in that he wants to cut taxes and reduce debt, but then how are you going to finance infrastructure spending? Even with PPPs, the public does have to participate in some way – so it’s not clear. Even if he has an executable plan, it’s uncertain whether Trump will be able to coalesce the necessary support for infrastructure programmes.
I’m not stating a position on either candidate, but on balance Clinton has more experience and her administration will have more experience working with other political parties, other governmental departments and agencies, other levels of government (states, municipalities), and the private sector, to be able to bring together the people and organisations needed to successfully implement infrastructure policy.