This article is sponsored by Vauban Infrastructure
What opportunities is the digitisation mega-trend creating both in terms of new investment and value creation?
Mounir Corm: The incredible increase we have seen in terms of the usage of electronic data means you need more transportation and storage of that data. That means capex is required to fund new infrastructure, notably in the fibre space, where we have been investing for the past decade.
At the same time, digitisation is also an important trend impacting asset management. Digitisation can add a new layer of value to legacy infrastructure, notably in the mobility sector. For example, we have done a lot of work implementing digital technologies in the carpark sector in order to monitor usage of assets, ease access to assets and push offers to clients. We are improving the user experience because it is easier to book a carparking slot online than to drive round until you find a space, whilst also attracting new customers, therefore adding value to assets.
A second opportunity that we are exploring in the carpark sector involves adding micro data centres at the bottom layer of the car park, creating a new use for the space.
What about opportunities created by decarbonisation?
MC: Again, with decarbonisation, there is a clear need for new assets, first in the field of renewable energy. But there has been so much liquidity allocated to those assets that it is difficult to find the right risk-adjusted returns. The energy transition is not limited to renewables, however. It requires a much wider transformation including district heating, smart metering and waste management. Very large amounts of capex are required to decarbonise the entire economy and we only have the next decade to do it.
“Investors will see that well-structured transactions are CPI-correlated and relatively immune to interest rate rises”
And it isn’t only about building new infrastructure, of course. There is also a lot we can do to decarbonise legacy assets. We have committed to make our carparks carbon neutral by 2025, for example, through a variety of measures, including the introduction of EV charging facilities. This is both reducing emissions and adding value, through the inherent value of the charging facilities themselves and because of the new users they will bring in.
There has been a significant increase in the focus on sustainability globally. What impact is that having on the social licence to operate?
Gwenola Chambon: We have observed an increased focus on sustainability across the spectrum, from citizens through to policy-makers. That has been exacerbated by covid and the growing recognition of the fragility of our environment. As owners of infrastructure providing essential services to communities, it is vital that sustainability is embedded in our DNA. The debate as to whether ESG adds value is over, in Europe, at least. Because, at the end of the day, we know that if you don’t operate within those parameters, your position will be untenable in the future.
With the latest IPCC report, there is a clear recognition that we have a decade to take action to change the trajectory that we are on. That will shift behaviour amongst all actors, from corporates and asset managers to investors. There is also regulation coming in that will help foster that change and, in particular, help investors make comparisons and identify greenwashing. From now on, we are all going to be judged on our actions and not just our words.
Does the current economic environment present any challenges for the sector?
MC: It depends on the type of asset and the way that the transaction is structured. Global supply chains have been put under pressure over the past two years, leading to delays and price increases.
Of course, this has impacted infrastructure assets that rely on that global supply chain and where the revenue stream is not correlated to inflation. Again, focusing on core, robust assets is the key to mitigating those potential impacts.
Meanwhile, assets acquired at high prices using short-term finance will be most exposed to refinancing risk when interest rates rise. In some sectors, this has widely been the case. There is also risk for those sectors where there has been a pricing bubble and where people have been underwriting at very low risk-adjusted returns. If you bought into a solar farm at less than a 5 percent return and interest rates come back to 2 or 3 percent, there is not much room for the risk premium.
GC: The reality is that interest rates have been falling for every vintage since the global financial crisis while in parallel massive amounts of money have been channelled into the asset class. That has made it very difficult to identify strong asset management as the market was an ideal environment for sellers. When interest rates rise, however, the performance of asset managers with capital gains strategies may be impaired and that will be the opportunity to distinguish among asset managers those that have effectively been able to concretely create value.
How are you incorporating climate resilience into your investment approach?
GC: An analysis of climate resilience is part of our due diligence and last year we also conducted a global review of climate resilience across the entirety of our assets under management. Some assets proved to be incredibly resilient whilst others, such as our rail assets and assets located closer to the sea, were obviously at greater risk.
Having performed that analysis, we are now taking actions to mitigate those risks, implementing KPIs and monitoring progress against them, whilst compensating where the asset is facing difficulties relating to climate change and meeting net-zero targets. We are reporting to investors in all cases. We are also involving all stakeholders including users, regulators, public entities and suppliers, to encourage them to take part in the journey.
How would you describe appetite for core infrastructure at this point?
MC: We see a very significant appetite for core infrastructure. That is partly because the asset class is maturing and the distinctions between the different risk stratifications are becoming more widely understood. Historically, there was just infrastructure and people were entering the space either with a project finance or fixed income mentality or from the perspective of private equity, with a value-add approach. Now the frontiers are more clearly defined.
Furthermore, the pandemic has shown that core infrastructure is extremely resilient. Returns have been strong and yields have been maintained. The essentiality of these assets is proven and that has re-enforced appetite from clients. Now, with a change in the macro-environment and the return of inflation, that will provide an additional benefit for core infrastructure. Investors will see that well-structured transactions are CPI-correlated and relatively immune to interest rate rises.
Add to that, the important capex needs when it comes to building new infrastructure and refurbishing old infrastructure, as well as the need to digitise and decarbonise to create more value, and the opportunity is vast.
Why is the mid-market the place to be?
GC: There has been a tendency towards big is beautiful in the infrastructure space with Godzilla funds emerging everywhere. When I started out in my career, a €1 billion fund would have been considered large. Now funds of over €20 billion are not uncommon.
“We know that if you don’t operate within those [ESG] parameters, your position will be untenable in
There are a limited number of players that can tackle those super-sized transactions and so in many ways they have carved out their own niche. But as those firms have moved up the size spectrum, the mid-market has become markedly less crowded. And after all, the majority of core assets are not that large – motorways, tramways, most utilities. These can all be tackled by mid-market strategies.
MC: Mid-market transactions are complex. There are many stakeholders, and you can’t just do those deals by writing a large cheque. A big auction process where investment bankers are running the show is very different to working with local municipalities, users, industrial sponsors and employees. You have to have deep knowledge and experience and you have to be long-term investors. When you are dealing with a local essential asset, you can’t just come in and own an asset for a year or two and make a huge capital gain.
And as Gwenola said, the mid-market is becoming far less crowded as other GPs not only raise larger funds, but also move into the value-add space, pursuing more service-orientated assets and assets in emerging, high-growth sectors. We focus on hard, traditional infrastructure, where we can support value creation underpinned by the digitisation and decarbonisation mega-trends.
GC: I would absolutely agree with Mounir that a long-term strategy is essential. The average rotation time of infrastructure assets has fallen to two-and-a-half years. That makes no sense. If you really want to generate long-term value, it is going to take a good deal more time. We need to consider the fast-evolving needs of the communities served by this infrastructure. Just think about the changes that have taken place as a result of covid, with new ways of working and new ways of maintaining and operating infrastructure assets. It is important to have those stakeholder-centric discussions and public entities, regulators and communities need to trust that investors are on the hook for the long-term.
What are your plans for the year, or years, ahead?
GC: Given the pace of deployment of our current fund, we will be raising a successor in the not-too-distant future. And we will use that capital to address the decarbonisation and digitisation challenges that will affect all infrastructure going forward. Given the scale of the capex required to meet those challenges, we expect to be incredibly busy over the next decade, pursuing a volume of opportunities that is going to exist in our market in a way that has never been observed before.