Q: Why do you think there is a compelling opportunity for infrastructure investment in growth markets?
GM: At the macro level, what we have in these markets is high GDP growth. We’ve seen 3 percent or higher GDP growth going back in history and forecasted for the next five years, at least. The other key macro trend – if you look at the last 65 years – is that we’ve had huge urbanisation in emerging markets compared to developed regions of the world. Seventy-five percent of the world’s urban population is now in emerging markets. When taken together, you have a large and growing need for new infrastructure as well as a need to improve existing infrastructure in emerging markets. This emerging market infrastructure investment requirement is rapidly overtaking the infrastructure needs of the developed markets, despite those needs also being quite substantial.
Q: How are those governments reacting to this need for private infrastructure investment?
GM: You have this internal competition, if you will, that’s going on between these countries. Host governments in emerging markets know they’re competing against other emerging economies for private capital. They know their internal budgets cannot fund all their needs. If they don’t adjust their regulatory and legal structures and make it compelling to bring in private infrastructure investment, then they’re going to fall behind and not keep up with that growth. Private capital finds its way to those countries that take the necessary steps to provide an attractive investment environment for long term investment in infrastructure. In emerging markets, some countries have been successfully attracting long-term private infrastructure investment for the past 10 to 15 years.
Q: What’s the key to being successful in these growth markets?
GM: The firms that are going to be successful over the long run are those that realise you just can’t suddenly go to another sector without systematic preparation and building appropriate depth of expertise.
Our firm knows the power sector. We know power generation, distribution and transmission and infrastructure that services the power sector. We know it very well. We have professionals who have been investing in these areas for many, many years now. For any investment firm out there, it’s wise to invest in areas that you know well, where your internal expertise is proven.
Q: How do you invest in the power sector?
AM: We successfully invested our first three energy funds and recently closed our fourth on $2.75 billion. The focus for previous funds has almost exclusively been on electricity generation businesses offering scale, diversification and growth and market-leading, high-growth electricity distribution businesses.
These businesses, once established, developed and improved, can be exited either via trade sale to international or regional energy companies, financial investors, or via IPO.
For power generation, we create what we call ‘buy-and-build platforms’ with a geographic and technological focus. For example, in our third fund we have five renewable energy platforms that do a combination of wind and/or solar in Brazil, Chile, Mexico, India and pan- Africa.
We’ve invested in three electricity distribution utilities, which are large operating businesses through our energy funds. Our focus has been on high-growth businesses where we see an opportunity for real transformation, often in countries where electricity penetration is low. For example, in Uganda, we owned a utility for 10 years. When we came in, electricity access was only 5 or 6 percent of the population. By the time we exited, it was close to 15 percent.
Looking ahead, given the hundreds of billions of dollars of projects which have been built over the past 20 years with private capital, we see an increasing opportunity to invest in high-quality operating assets in the power sector value chain as well.
Q: What do you do when these platforms reach scale?
AM: We are in the business of creating long-term power businesses. But as a closed-end fund, ultimately, we do look for exits. We exited all our Fund I assets. We’ve exited virtually all our Fund II assets. And in due course, when the platforms reach scale, we will be looking to exit our Fund III platforms. However, in most cases the platforms themselves carry on with strong assets, management teams, and pipelines for growth.
GM: But getting them to scale is not the end of the story. In order to get full value for what we’ve done, we need to make sure we have sustainable businesses for the long term so that buyers recognise that and pay a good valuation upon exit. We’ve built a certain reputation for building companies that will be longstanding, in markets that are very receptive to long-term private investment.
Q: How much competition do you see right now in the growth markets you invest in?
GM: You don’t generate consistent returns and the type of success we’ve had without attracting competition, and we’ve certainly seen that. Historically however, most of the infrastructure funds being raised continue to focus primarily on the US, Europe and OECD countries.
But there is an evolution going on in the market where infrastructure investors are seeing intense competition in the developed world, returns going down, prices going up, and are looking for other ways to make a return. Sometimes they expand the definition of infrastructure and they take more risk in order to deploy their capital. There is an increasing interest by institutional investors to consider investing in infrastructure in the growth markets. These investors have been seeking the best strategies and infrastructure platforms to do this. I’m confident that institutional investors will increasingly turn to infrastructure investments focused on growth markets as they learn more about the clear macro trends and how certain growth market countries have an established track record of implementing acceptable long-term investment environments for private capital in their infrastructure sectors.
Q: How do you mitigate risk from your investments?
AM: We’re looking to create long-term value, and part of that is managing risk. Often, when people ask about risk, they’re really thinking about political risk. Data actually shows there have not been many major political risk events in the power sector in our markets. As countries need to attract foreign private capital to invest in infrastructure and other major projects, there’s quite a strong aversion to breaking contracts.
However, there are times when we won’t invest in a country or market or opportunity because we don’t feel the contractual framework is sound. But that’s the core of our business: assessing the contract, within the context of the regulatory and legal environment. A big part of our capability rests on our analysis of the contractual framework which we’re investing in.
There are also products we can use like political risk insurance offered by the World Bank Group’s Multilateral Investment Guarantee Agency. One element of MIGA’s insurance is currency convertibility, which protects our ability to convert foreign currencies and to repatriate proceeds. Similarly, we take MIGA coverage in some of our markets to cover the contingency for a major political risk event. I always say I would never make an investment if I thought there was a real possibility we would be calling on MIGA political risk insurance. But in some less-developed markets that have less of a track record with private-sector investment, it’s prudent to consider those kinds of products. Furthermore, having the World Bank as a key stakeholder in a project helps to prevent political risk incidents in the first place.
Q: How else do you partner with development finance institutions?
AM: The multilateral development banks and the individual country development finance institutions are major players in our space, and in virtually all cases they’re really partners. They enable and support private investment into the countries. Some of the institutions do more work than others on the regulatory front, working directly with government to help make sure everyone understands the frameworks required to attract foreign investment. Some of them are more focused on direct financing of projects, providing significant amounts of debt, and in some cases also equity and other private risk mitigation products.
Q: What kind of returns do you expect for investing in growth markets?
GM: In some instances in the developed world, investors are seeing a risk-return payoff that is not in balance. Growth market infrastructure – given the significant need and value-add of these investments plus the less-intense competitive environment – provides the opportunity for competitive returns for the risks that are taken. ?