Creative de-risking required
Although there are real risks to investing in infrastructure in emerging markets, investors need to make better use of the de-risking tools at their disposal. They also need to stop thinking about emerging markets as a “single risk pool”.
These were the key messages from Jim Yong Kim, former president of the World Bank and current vice-chairman of Global Infrastructure Partners, at the opening of the summit. Failure to heed these calls could lead to investors missing out on a promising growth story. This is because increasing automation all but ensures that future development in emerging economies will not come from industrialisation.
“It’s not going to be about cheap labour anymore,” said Kim. “It’s going to be about access to capital and access to human expertise.” That includes capital and expertise for transport, energy and broadband – the kind private investors specialise in, if they can overcome their obsession with the OECD…
ESG needs measuring
If there was one rallying cry from our debut ESG forum, held on 18 March, it was the need to better measure – and standardise – the implementation and impact of environmental, social and governance criteria.
At the moment, beyond measuring the ‘E’, which usually comes in the form of CO2 savings reports, there is simply no consensus on how to holistically determine whether ESG goals are being successfully implemented.
The good news? No one is in any doubt about ESG’s importance. As Vantage Infrastructure senior partner Valeria Rosati put it, the most positive impact for companies of pursuing ESG goals is that they are less likely to find themselves “breaching the social contract”.
Heading for impact
Sticking with this subject for a little longer, the other key takeaway to emerge from Day One was how thinking around ESG is changing. “ESG is evolving from a risk-management tool to an avenue for value creation,” argued Esther Peiner, managing director of Partners Group’s investment team. That puts it solidly on the road to creating an impact.
The key to getting there, though, is through senior buy-in. “Is it something the founder is highly convinced of and speaks about very frequently?” asked Peiner. “Or is it just two people within a very big investment engine?”
Time to talk to Joe Public
To say the threat of populism is on everyone’s minds would be something of an understatement. Its impact on the industry – from nationalisation to restrictions on foreign investment – has not escaped anyone’s notice either.
“As an industry, we are not winning the debate,” said Tom Maher, head of business development at Whitehelm Capital, referring to the asset class’s poor perception among the public.
The solution? Reach out to the public directly.
“When you start the argument saying that you need to lobby the government, you’ve already lost the debate,” said InstarAGF Asset Management head Gregory Smith. “You have to go back and get the community on your side.”
We’ve yet to reach our peak
OK, you can relax: despite all the headlines about record amounts of capital being raised, we have not yet reached peak infrastructure. That was according to 66 percent of the audience for a panel discussion on the subject (though they may have been biased).
But as Tom Masthay, director of real assets at the Texas Municipal Retirement System, pointed out, it’s a “foregone conclusion more capital is going to get allocated into infrastructure”. He should know, considering how little US pensions still commit to the asset class.
Valuations, though, remain high in a number of markets. “There’s certainly a sustained number of increasing transaction values across Europe, Australia and other markets,” said Robert Hardy, managing director at JPMorgan Asset Management. “There’s a lot of money chasing very few assets.”
‘Not all data centres are created equal’
It was inevitable when we hosted our first ever digital infrastructure forum that data centers’ legitimacy as infrastructure assets would crop up. The conclusion? We probably need more data.
For starters, the market is skewed towards North America. The European opportunity “is very limited at the moment,” said Verena Kempe, co-head of private equity at FERI Trust. Morgan McCormick, a director with pension fund manager OPTrust’s private markets group, pointed to the issue around shorter-term contracts and how they affect these assets’ underlying risk profiles. As BlackRock Real Assets vice-president Pauline Roteta aptly summarised it: “Not all data centres are created equal.”
What no one doubts, though, is how essential they are these days. As Wired’s Hammersley told attendees, a road can be closed and things will still be OK – a data centre, not so much.
Energy transition is getting complicated
Investors in renewables made it clear at our Energy Transition Forum that this subsector of infrastructure is undergoing a dramatic transformation. As feed-in-tariff regimes and long-term contracts fade away in OECD markets – and digitisation of the grid kicks in – investors are having to grapple with a more fragmented market. “We see a lot of new features coming into the investment thesis,” said Frédéric Palanque, managing director at Conquest Asset Management.
Investors are also being pushed to look at the emerging energy storage field to solve the problem of intermittency in renewables. However, but they made it clear they were trying to take as little risk as possible. “We don’t invest in technology, we invest in solutions,” said Marco Van Daele, chief investment officer at Susi Partners. “Solutions that can be monetised through long-term contracts.”
As these changes sink in, complexity is the sector’s new buzzword.
LPs have some complaints…
This wouldn’t be an infrastructure conference without LPs having a bit of a moan about GPs, would it? In addition to the usual complaints about fees and lack of transparency, there were two other expressions of discontent worth highlighting.
The first came from Masthay of the Texas Municipal Retirement System, when he was asked about GPs’ claims that they add operational value. Let’s just say Masthay isn’t seeing much beyond managers’ ability to bring capital to the table.
The second came from bfinance managing director Peter Hobbs, who said LPs had kept bringing up the issue of GP ‘style drift’ in recent discussions.
Forget about the long term
For a conference full of long-term investors, it must have been tough to hear Wired editor-at-large and self-styled ‘futurist’ Ben Hammersley declare that any predictions beyond the next five years that are not related to climate change are … a word we can’t really print here.
However, his wider – and very important – point was that the rate of change has accelerated exponentially in our world, and that this has of course been driven by technology.
That means investors have to become much better at spotting the early signs of what will grow to become transformative changes or wake up to find their long-term investments being dangerously stuck in the past.