Infracapital invests in infrastructure across Europe. What are some of the benefits of having a diversified portfolio?
Since 2004 we've made 53 investments, in 19 sub-sectors, across 13 countries.
A pan-European diversified mandate means that we can focus on the areas that we believe offer the best value at any given time and leverage our multinational team to build relationships across those regions and sectors. When we're talking to developers, entrepreneurs, or corporates about new opportunities we can refer them to businesses we own, or have owned in the past. That means if we own an integrated energy solution business that's been operating for many years and we want to look at creating a new one in a different jurisdiction, we can speak to our potential partners and say “look, we've done this over here, and we have a lot of experience with businesses just like this one.” Having these kinds of relevant, real-world reference points is really important.
Equally, we've grown small businesses into much bigger players. If we're talking to an entrepreneur about what they want to do with the next stage of the business, we can point to our experiences and successes and give them comfort that we can achieve what we say we're going to.
Amid rising competition, the definition of infrastructure seems to be broadening, with assets like data centers targeted by real estate players as well. Do you see the lines between these two asset classes starting to blur?
I think deals where you see that kind of blurring between asset classes are in the minority; what makes up most of the infrastructure sector is quite different from real estate. If you look at the genesis of infrastructure as an asset class, it started with initiatives like the PFI (Private Finance Initiative) and the PPP (Public-Private Partnership), where many assets were often backed by some form of real estate. Many early lenders looked at the sector in terms of a variant of lease lending, which is to say the debate over what constitutes infrastructure – is it like private equity, real estate, or fixed income? – isn’t new.
But there are emerging opportunities, such as data centers, where the debate has reignited. Concepts such as smart cities that bring in all sorts of elements, from data communication to transport networks to real estate, are another example. The challenge with smart cities is how to recognize the revenue stream for the infrastructure components in particular, but it’s an interesting area to look at.
What are some promising ways to source deals in today’s market?
We see good deal flow stemming from conversations with corporations that have infrastructure assets, or a desire to build infrastructure assets and portfolios, and are looking for an experienced financial partner to support that. I think we're going to see a regular stream of these kinds of deals.
Take broadband internet. There is significant investment opportunity in places like the UK, Germany, and Poland, countries that are lagging behind in converting copper wire to full fiber. In these areas, the proportion of fiber to the premises (FTTP) – when fiber optic cables run from the telephone exchange directly into a property – is still very low. If you can secure a fiber network in a second-tier city or rural area where you’ve got first-mover advantage, and a subsidized arrangement which reduces your net capital, you’re in a strong position. It’s an attractive opportunity for greenfield investors looking to capitalize on new technology.
How are rapid changes in technology shaping the infrastructure industry?
There are definitely two sides to this, which make me both excited and also wary. The characteristics that people look for in infrastructure are predictability resilience and stability. Technology is the opposite of that, because it creates change. That said, it’s also creating an enormous amount of opportunity – including the switch from copper networks to fiber that we just talked about. This is a generational shift for telecoms and data transmission, and as a long-term, prudent infrastructure investor, we are comfortable that the technology works and we can see commercial opportunities around that.
Contrast that with electric vehicles (EV) and EV charging infrastructure. I think we can, with a degree of confidence, predict that the rise of EV is pretty certain. People will have views on how rapidly that rise will take place, and when we will come to rely solely on EV. I think we can also take the view that the charging technology is not that difficult per se. But there are some difficult questions around it: where should the charging technology be? How does it connect to the power supply? Is the revenue stream going to be the rental of the infrastructure, or is it going to be a margin on the energy consumed, or is it going to be the value of the data that is created by knowledge of movement usage and everything else? With EV it's much more complex than, say, investing in fiber, because there's still so much change to come.
What other interesting investment opportunities do you see arising as a result of new innovations?
One example would be energy storage, with battery storage a subset of that. Looking at the energy market, with the rise of intermittent generation from renewable sources, having storage seems essential. But there are some challenging questions around that as well: the technology for storage is evolving at a relatively rapid rate, so which technology solution should you invest in? What is the commercial situation where that fits in? What is your revenue stream, and where will the revenue come from? How predictable is the price and volume of that?
So that's why I say it's both an exciting and a cautious time. On the one hand, technological change is driving significant infrastructure investment. But on the other, you have to think: a) how confident am I in backing tech solutions that are relatively new, and b) if I own some of the incumbent solutions, how at risk are my existing assets to these changes? Am I going to be left exposed with an asset that’s going to decline in value? What does the future look like for me?
All in all, I’d say that we think a lot more about technology today than we did 10, 15 years ago. There’s so much disruption and innovation going on, and that makes infrastructure a very exciting asset class at the moment – I think that's going to be the case for many years to come.
Let’s talk about returns. Infrastructure is designed to provide steady, uncorrelated returns, but amid slowing global growth, how do you see the asset class performing?
Since the Global Financial Crisis, we’ve enjoyed a very strong economic position and a strong market position, and it’s been a really good period in Europe to be investing in infrastructure. You've seen demand for assets increasing and therefore pricing becoming more competitive, which benefits fund managers when it’s time to sell. But at some point, that won't be the case: there are always cycles. And it’s important to think about how these investments are going to perform in tougher times. If we've done our job, they will be resilient, and prove their worth as a low-risk, countercyclical asset class.
But, for some of the more exciting areas of infrastructure – where you don't have the same sort of centrality and resilience, perhaps the income streams are less predictable – these are more likely to come under stress, and to be more exposed to the downturn. So for those thinking about investing or increasing investment in the asset class, it's important to look at that risk/reward equation.
Infracapital invests in, builds, and manages a diverse range of essential infrastructure to meet the changing needs of society and support long-term economic growth. We take an active role in all of our investments, whether nascent or large, to fulfill their potential and ensure they are adaptable and resilient. Our approach creates value for our investors, as we target investments with the scope for stable and sustainable growth. Our portfolio companies work closely with the communities where they are based, to the benefit of all stakeholders. Infracapital is well positioned to deliver the significant investment required to help build the future. The founder-led team of experienced specialists has worked with more than 45 companies around Europe and has raised and managed over £5bn across five funds.
Infracapital is part of M&G, a leading European savings and investments business. M&G manages the long-term savings of more than seven million people and is a major investor in the UK and in the global economy. Total assets under management are £341bn (as at 30 June 2019).
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