Vauban on redefining the longevity of infrastructure

Infrastructure is a long-term asset class and requires a different approach to a PE-orientated one, says Vauban Infrastructure Partners’ Mounir Corm.

This article is sponsored by Vauban Infrastructure Partners

Infrastructure is often described as a long-term asset class but in reality, that is only true of certain strategies. Mounir Corm, deputy chief executive and founding partner of Vauban Infrastructure Partners, believes that a truly long-term approach is important for ensuring resilience through the cycles, enabling decarbonation and for providing investors with duration in their portfolios. Meanwhile, the maturation of the infrastructure secondaries market means that investors can access liquidity, even in long-term closed-end funds.

Mounir Corm

Infrastructure is typically thought of as a long-term asset class. But is that true of all strategies?

No, it is not true of all strategies. Infrastructure’s long-term credentials have been distorted significantly in recent years as the asset class has developed from two distinct backgrounds. There is the de-risked, fixed income return that comes from a project finance approach. That is clearly long-term at its heart. But at the other end of the risk/return spectrum, infrastructure investments are being made that are far more private equity-like in nature. Those more value-add strategies have markedly shorter holding periods and represent a very different type of infrastructure play.

We believe that true infrastructure investment is predicated on real assets that provided essential services and which have long-term contracted revenues. These assets also tend to have multiple stakeholders from users to public entities, regulators and industrial partners. A long-term approach is critical for aligning the interests of all these groups.

Why is a genuinely long-term approach an advantage, particularly in the current challenging macroeconomic environment?

A long-term approach is important both from the perspective of the asset and the perspective of the underlying LP. In terms of the asset, a long-term approach means you are a provider of patient capital. It also means that you are deliberately targeting infrastructure that will be robust and resilient through economic cycles.

We have been doing this for 15 years and have assets that have been in our portfolio for that length of time. We held those assets through the global financial crisis, through a long period of low interest rates and cheap money, through a global pandemic and now through a period characterised by an energy price spike, high inflation and high interest rates. Performance has been steady throughout these very different economic environments, which is precisely what most LPs are looking for from their infrastructure exposure.

That stability derives from the fact that we take a long-term view, selecting low risk assets that have long-term cashflows and proper inflation correlation. We also ensure that long-term financing structures are in place, which means the assets are immune to interest rate volatility as well.

Meanwhile, a long-term approach is important for LPs because it offers them duration. Most institutional investors, family offices and sovereign wealth funds need some absolute return in their portfolios, which they get from private equity, growth capital and venture. But they also need some duration and cash yield, with interesting premiums to the risk-free rate.

When you invest in long dated funds, you get the benefit of that duration, which provides immunity to macroeconomic cycles by virtue of the fact that you are locking in a risk premium rather than an absolute return. Our portfolios have exhibited enhanced performance as inflation and rates have increased. Having steady risk premiums over a long duration is an important component of an investor’s allocation strategy.

“There is not a week that goes by when we don’t have an energy transition opportunity come across our desk”

How would you describe investor appetite for long-term core infrastructure today, given the macroeconomic environment?

We have observed a consistent increase in investor appetite for long-term infrastructure for many years. When we first started out, there were those that said that a 25-year closed-end fund represented too long a duration, but those objections have entirely melted away and almost all institutional investors are keen to incorporate that duration piece in their portfolios today.

One important reason for this shift in sentiment is the maturation of the infrastructure secondaries market, which has resulted in significantly enhanced liquidity in the space at attractive pricing. In fact, you could argue that there is greater liquidity available through the secondaries market than there is through the sale of assets themselves in shorter-term strategies.

We have demonstrated that accessing liquidity is possible with secondaries sales in some of our previous vintages at robust pricing. That has given investors a lot of reassurance and helped increased appetite for long-term infrastructure.

The question of whether investors should be looking more at core or more at value-add in the current environment is also a hot topic, but I don’t believe that kind of thinking is helpful. Investors should focus on risk premiums when constructing their allocation strategies and risk premiums should not vary substantially across macro cycles. What should vary instead is the risk-free rate. If you invest in true core assets in a higher interest rate environment, that should therefore result in a higher return.

Conversely, it could be argued that a value-add capital gains strategy becomes more challenged in a higher interest rate and higher risk environment, because the risk premium may diminish. But diversification is critical to portfolio construction too. You need core because you need a yield component. But you also need value-add because you need that capital gains piece as well. To favour one over the other simply because of today’s macroeconomic environment may not be the right approach.

What types of new investment opportunity are you finding attractive for your long-term strategy?

The energy transition is clearly a significant component of what we do. There is not a week that goes by when we don’t have an energy transition opportunity come across our desk, and that is true of all countries and all types of asset; from pure renewable generation to distribution, transmission and energy efficiency. Biogas, district energy, smart meters, waste, are very strong themes for us. Furthermore, the energy transition impacts all other kinds of infrastructure assets, most notably mobility. The electrification of transport is another important investment thesis.

Then, of course, there is the world of digital infrastructure. We have seen a huge number of fibre and towers transactions during the past year. In some countries, including Germany and the UK, those deals have been highly competitive and more private equity like in nature, meaning challenges may be faced in the coming years.

We have also seen some very interesting deals, particularly in France, and expect to see the continued consolidation of fibre networks as these assets move from greenfield to brownfield, as well as further opportunities for towers and data centres. Of course, the energy transition has a role to play in digital infrastructure too. The decarbonisation of data centres is also set to be a hot topic going forward.

To what extent do you believe valuations have adjusted for these new core infrastructure investments?

We have continued to invest through the cycle because we are seeing interesting opportunities available with far less competition due to less capital available in the market. We have also repriced all our new acquisitions in line with today’s interest rate environment. Everything that we do now has been re-rated by around 300 basis points when compared with what we were doing before. It is a very good time to be investing, as it was back in 2009-10.

How does a long-term approach support a manager’s ability to transition assets during their hold period?

A long-term perspective is important to transitioning assets because it means there is a focus on ensuring assets are resilient to climate risk and that services being provided are relevant and desirable for many years into the future. All of this can be done while reducing the global carbon footprint.

Furthermore, it allows for a long-term view on capex, taking into account savings and value creation that will result in the context of a long-term investment horizon. If you are only holding assets for three to five years, as many value-add GPs do, you do not have the ability to incur capex because it will not yield return in the life of your investment. For Vauban Infrastructure Partners, having a long-term approach is important to our stakeholders – including regulators, industrial partners and users that contribute to our social licence to operate. In the context of the current political environment, this is extremely important.

Long-term transitions in practice

Vauban’s long-term transitional approach provides revenue opportunities, according to its deputy chief executive.

We own a district heating asset in Northern Italy, where we are currently engaged in discussions with our public counterparty for decarbonisation capex involving the acquisition of new, more efficient turbines and the installation of solar panels to generate green heat.

We would then decarbonise the asset on Scope 1 and Scope 2 emissions. The public sector counterparty is interested because they will not have to pay to deliver on that and we are happy because of the enhanced long-term capital appreciation and additional return we will receive as a result of a potential contract extension.

Another example of long-term transitioning involves our car parking assets, where we are running a programme to install 5,000 electric vehicle (EV) charging points in city centres. Not only is that contributing to Scope 3 emissions reduction, but it is also generating additional EBITDA as EV owners without access to private EV charging facilities take out subscriptions to ensure access to our car parks, which provides enhanced long-term revenues.