“If you’d asked me, ‘Was it conceivable that Germany would move abruptly away from Russian energy?’, I’d have said ‘no’ – I couldn’t foresee it,” Fiona Hill, senior fellow at Brookings Institution told members of the Infrastructure Investor Network, during Tuesday’s keynote interview. Russia’s president, Vladimir Putin, made that same bet before invading Ukraine in February 2022.
“It’s one of the reasons why he thought he could get away with the ‘special military operation’ in Ukraine, [expecting] a limited reaction,” said Hill, a foreign policy expert whose career includes serving as presidential adviser in three US administrations. “And in fact, he had a good reason to think that,” she added, referring to Putin’s annexation of Crimea in 2014.
So, do the developments of the past 12 months put an end to Russia’s role as energy supplier to Europe for good?
“It’s not to say that Russia wouldn’t still be some kind of energy supplier down the line, but not at the scale that it has been,” Hill responded.
How much is too much?
We warned at the start of this year about GPs taking infrastructure’s inflation-linked passthroughs for granted, and it seems Gwenola Chambon, chief executive of Vauban Infrastructure Partners, is alive to the issue.
“We are indexed to inflation fully. We had in our business plan a 1.5 percent increase every year and whatever is beyond that level is going to massively impact the performance of our fund,” she told members of the Infrastructure Investor Network.
“How long are we going to be able to pass these increases? It’s massively impacting and the question for us is to limit ourselves at maybe 7 or 8 percent, because we don’t need it. Everything in the cost is already passed through, so the question is how much can we go and how much can we push before hitting something that’s no longer acceptable? That’s what we are figuring out on all assets,” Chambon explained.
To which William Smales, Morrison & Co CIO, added: “Regulators have a wonderful way of grabbing back value if they’re not happy with you”
In an era of windfall taxes, it’s a new kind of innovation to see GPs limiting their own profits.
Get ready to get stressed
Will infrastructure pass the ultimate resilience stress test? Judging from the panel, the answer is yes, but not without pain. There was even a hint of glee that abilities would be tested from Antin’s Dr Angelika Schöchlin: “Finally, it’s the ultimate test for infrastructure.”
IFM Investors’ Deepa Bharadwaj thought that the test had already been passed in that the industry “survived a global pandemic and we’re still here”.
Apollo’s Dylan Foo didn’t really think it was a test, but thought events were getting interesting: “We spent the whole weekend looking for any asset that had cash exposure to regional banks. I doubt anybody here… had an investment committee ask them about exposure to regional banks and cash management profiles of their assets. If anyone did, they’re a genius. When these unforeseen risks happen quickly, it’s an indicator of stress in the system.”
Irini Kalamakis, from OMERS, joined the pessimist side and argued that we were yet to experience the full extent of the shocks and that the way people tap into the asset class to solve their investment problems will be recalibrated: “A lot of the upset of the last three years was mitigated and we’re about to go into a new normal. So, track records no longer in some ways apply because we’re entering a new world.”
Size still matters for LPs
Our LP panel discussed smart strategy selection, and two of our panellists set out their stalls for why mid-market funds were right for them, while the very largest funds were less attractive.
“When we look at managers [who have] a $20 billion fund, and see the management fee attached to it, we struggle to see how that carry will change the way that manager behaves. So for us it’s the smaller sized [funds] which are the most interesting opportunity,” said Christian Wiehenkamp, chief investment officer at Perpetual Investors, adding that funds of around $1 billion in size were more in its wheelhouse.
“You have to think about where those large managers can exit to,” he added, with the metaphorical game only able to continue if someone else is there to pick up the ball and run with it.
Henrik Lundin, chief investment officer of IMAS Foundation, echoed this, saying that he liked to invest in funds of a certain scale, but that were also small enough for them to still have influence – rather than getting lost within a far bigger blind pool of capital.
This would make it a truly two-way relationship, he said – and after all, the LP-GP nomenclature suggests that it truly should be a partnership.
To boldly go where no fund has gone before
We’ve seen some out-of-this-world stuff being given the infrastructure label over the years but it seems some investors are now thinking about that literally.
Omar Jaffrey, founder of digital infrastructure fund manager Palistar Capital, told members that one LP recently asked him if the US-based GP would consider investing in satellites. Jaffrey, who was global head of satellite investment banking at UBS between 2003 and 2009, didn’t entirely rule it out.
“I probably touched every project out there,” Jaffrey said. “Satellites are a phenomenal adjunct to everything we do in normal terrestrial. The adjunct is super-critical. The challenge is you go local or global. The capex cycles are very challenging. The cost of launch and insurance are not insignificant. These are phenomenal projects only multi-billionaires can back. I’ve seen a lot of scar tissue where even the guy who owns it for the third time from bankruptcy still doesn’t do very well. There’s a lot of opportunity, you have to have eyes wide open and it’s a brilliant adjunct.”
Right, who wants Mr Musk as a partner, then?
Can infra be served up with a smile?
We don’t often think of our industry as being customer-driven, but Marco van Daele, co-CEO and CIO of SUSI Partners, has noticed a major shift towards it, noting that GPs would benefit from having more customer-facing expertise. “You have to have different capabilities; you have to know how to build a brand; you have to know how to actually scale the installation,” he stressed.
It’s not really about the technical intricacies of the engineering only. Joost Bergsma, CEO of Glennmont Partners from Nuveen, saw this phenomenon, too – on the PPA side. “The number of industries – it goes from retail to brewing to insurance – that want PPAs has really massively increased. And I would say that it’s good for our sector,” he said.
Van Daele summarised it: “The skillset that is required as investment managers and as investors is very different than what used to get us here 10 years ago, five years ago.”
Asset managers may be used to being on the buy side, but maybe it’s time to take notes from a salesman’s handbook.
“Don’t confuse innovation with risk”
Rick Shrotri, managing partner, Digital Alpha, talks about technology risk in digital infra
Here are three sessions you won’t want to miss today (all times CET):
Sustainability ＆ ESG as a priority: maintaining momentum in challenging times: GRESB’s Cathy Granneman, Eurazeo’s Laurent Chatelin, ICG Infra’s Pénélope Dietsch, CIM Group’s Jennifer Gandin, and Igneo’s Niall Mills debate.
Fireside Chat: Underwriting risks and opportunities in digital infrastructure during an economic downturn: DigitalBridge CEO Marc Ganzi does a deep dive into digital infrastructure investing.
Defying gravity? Outlook for infrastructure valuations: Mercatus Rishi Karir, BCI’s Timothy Keeling, Manulife’s Recep C Kendircioglu, CBRE’s Kerron Lezama, DWS’s Hamish Mackenzie and Amber’s Maciej Tarasiuk tackle one of the hot topics of the day.
For the full agenda, go to our Global Summit homepage.
Today’s letter was prepared by Bruno Alves. Zak Bentley, Kalliope Gourntis, Isabel O’Brien, Daniel Kemp and Anne-Louise Stranne Petersen contributed