As measured by the number of delegates (around 500), it was clear that something special was in the air as Infrastructure Investor’s Berlin Summit 2013 got underway just over a week ago. By the end of a memorable event, two observations stuck in the mind.
One: if there were any doubt that infrastructure stands on the cusp of becoming a major asset class, such thoughts should now be dispelled. As panellists spoke of certain pension funds looking to hike allocations to 35 percent of their total portfolios, there were even whispers during session breaks of a “mini-bubble”. We won’t dwell here on the other widely heard observation that the pipeline of deals is presently offering slim pickings for the deal-hungry hordes.
Two: Political/regulatory risk is unquestionably top of the list when it comes to things that keep infrastructure investors awake at night. Against a backdrop of what has been described in our pages and elsewhere as the “capricious” acts of governments and regulators (and yes, Norway did receive more than a few mentions), it was no surprise to see nods of agreement when keynote speaker and former German Vice Chancellor Joschka Fischer referred to politicians as “opportunistic”.
However, there was also a call to those present to face the reality rather than merely dwell on it. In an on-stage interview, Global Infrastructure Partners’ chairman and managing partner Adebayo Ogunlesi spoke of practical measures that can be taken at the asset level to aid the perception of infrastructure funds as beneficial and responsible owners. Improving the customer experience and the careful application of leverage were two of the tools referred to by Ogunlesi. Politicians will find it less easy to take draconian measures against investors that have made notable improvements and pose little or no systemic risk.
Further, investors were urged to “be prepared” for political risk by doing all they can to factor it into their modelling. While one panellist admitted that the difficulty of forecasting political risk meant taking a “subjective view of probability” (which may have sounded suspiciously like guesswork to some), the question was posed as to whether investors always observe the observable.
In the case of Gassled, for example, did the Norwegian government’s desire to encourage new exploration and development have the potential to negatively impact investors in the pipeline network? The argument could be made that seeking to reduce transportation costs was a measure likely to be considered to some degree. Set against that, one would assume the blue-chip Gassled investor group had received pretty strong assurances to the contrary.
Private sector representatives were also told to “ENGAGE!” with the public side. This is written in upper case and with an exclamation mark in recognition of the unmistakable sense of urgency whenever the point was made (which was frequently). As an infrastructure investor, “be aware that you are part of the political process” said Fischer. “Don’t wait until you’re in the eye of the storm” said another speaker. And don’t just engage with government, but with opposition (possible future government) and the general public as well.
Investors were memorably advised not to “squawk in a bubble”. Drawing battles lines that needn’t exist is counter-productive. Engagement, on the other hand, is likely to lead to a degree of sympathy with the “other side’s” difficulties. In the case of governments cutting tariffs, for example, it’s arguably too rarely considered that the consequences of not doing so could be intolerable pressure on consumers in times of austerity. Something, somewhere has to give.
It’s often said of asset class investing that this is a “relationship business”. Because of the public-private element, this is arguably particularly true of infrastructure. In Berlin, there was a sense that the implications of this were beginning to be recognised – and just in time. After all, this is a major asset class in the making.