Stockholm (HedgeNordic) – With infrastructure investment sitting at the heart of many governments’ post-Covid economic recovery plans and a worldwide need for infrastructure investments, a much-needed flood of investor capital should not struggle to find opportunities to invest. The resilient and defensive nature of infrastructure assets – due to quasi-monopoly, regulated and long-term contracted cash flows – make this asset class an attractive allocation for institutional investors, particularly where there is an ESG focus.
“There is definitely a lot of capital piling up ready to be allocated to infrastructure as more investors are interested in getting a feel for the asset class,” says Gilles Lafleuriel, the infrastructure-focused Head of Sweden at asset manager Obligo. “Infrastructure is a fairly mature asset class now with a track record of a couple of decades behind its back,” he adds. “Not many infra managers have failed in their pursuit of delivering returns to their investors, which has comforted the interest from investors.”
“Not many infra managers have failed in their pursuit of delivering returns to their investors, which has comforted the interest from investors.”
Both infrastructure and real estate investments usually fall under the umbrella of investments known as “real assets,” tangible assets one can watch and touch. Yet, infrastructure investments share certain attributes that make them unique from a portfolio allocation context. According to Lafleuriel, “private equity infrastructure investments sit very well alongside real estate investments in a portfolio because they are touching different business models and are exposed to different risks.” Lafleuriel argues that infrastructure and real estate investments “are not working in the same way, especially when it comes to how cash flows are contracted and how remuneration works.” For that reason, “the inclusion of infrastructure into a portfolio brings diversification also within the real assets bucket.”
“We have a rather pure definition of infrastructure, which for us, involve tangible assets that are essential to societies and are delivering stable cash flows over time.”
“Infrastructure assets include assets that are essential to the society and, for investors, they are delivering stable cash flows over time because they are either operating in a monopolistic environment or involve cash flow streams that are regulated or long-term contracted,” explains Lafleuriel, the former head of real assets and alternatives at Nordea Asset Management. “We have a rather pure definition of infrastructure, which for us, involve tangible assets that are essential to societies and are delivering stable cash flows over time,” he continues. “The more essential the asset is to the community the better. It needs to provide an essential service that will help the communities and society as a whole. That is the characteristic on top of our agenda when we invest.”
Four Verticals of Infrastructure Projects
Although infrastructure construction projects can span a variety of industries ranging from power, transport, residential, and renewable energy to oil and gas pipelines, terminals and others, Oslo- and Stockholm-based Obligo has positioned itself as a trusted local partner tying international capital to Nordic sustainable infrastructure projects. “We are focused on sustainable infrastructure investments and everything that can contribute to climate change mitigation,” emphasizes Lafleuriel. Obligo has, therefore, identified four main verticals for its infrastructure investments.
“One of them is power generation,” starts Lafleuriel. “And because we focus on sustainable infrastructure and projects that contribute to climate change mitigation, we are obviously mostly focusing on renewable energy, such as wind, solar or hydro power,” he elaborates. Infrastructure projects in this vertical can also span to include power plants that generate electricity or heating from other renewable sources. “The second vertical is electricity networks,” continues Lafleuriel.
“When developing new ways of producing power, we also need to grow the electricity network accordingly, both at the distribution and transmission levels,” he explains. Any investments focused on increasing energy generation from cleaner sources need to be accompanied by an increase in transmission and distribution networks. “The third vertical is the electrification of the transport sector,” says Lafleuriel. “That goes all the way from the electrification of traditional road vehicles to the electrification of trains and boats,” he elaborates. “This transition from internal combustion engine vehicles to electric motors is not going to happen overnight, but we are seeing pockets of opportunities in each sector and we want to be part of this transition.”
The last vertical Obligo focuses on involves digital infrastructure. “We are living in a world that is more connected than ever and people are using more and more digital infrastructure to get information, to manage it and to communicate with each other,” says Lafleuriel. “We believe there are ways to do these digital infrastructure investments sustainably and we are willing to invest in this sector as well.”
Renewable energy space features the strongest pipeline of transactions across the infrastructure universe in the Nordics at the moment, according to Lafleuriel. “We see most deal flow in the renewable energy area, which is a sign of strong demand for those types of assets,” he explains. “As of today, at least, we also see fewer transactions within the electrification of the transportation sector, but we believe that will change over the next couple of years, specifically within the area of power charging networks, for example.”
Greenfield versus Brownfield Projects
Infrastructure investments can take many forms and have many classifications, with one distinction differentiating between “greenfield” and “brownfield” assets. While the latter is just the older brother of the former, a greenfield asset holds a degree of development and/or construction risk that the brownfield does not face, simply because it is operational, according to Gilles Lafleuriel of Obligo. “When investing in a brownfield asset, we are not shooting for the stars,” says Lafleuriel. The expected returns from these investments tend to end up in the mid to high single digits. “That is typically low when compared to traditional private equity, but on the other hand, we buy into much more predictable cash flows that are protected in various ways either via contracts or regulations.”
“When investing in a brownfield asset, we are not shooting for the stars.”
To target higher returns in the infrastructure space, some investors may opt for investing in so-called greenfield projects. “More sophisticated and experienced investors might be willing to invest a bit earlier on in the process, either in the development phase or construction phase, which involves accepting a higher level of risk and a wider set of risks,” explains Lafleuriel. “When investing earlier in the development of an asset, one can achieve higher returns on investments,” he elaborates. Obligo is launching a new infrastructure fund that will make investments into a mix of greenfield and brownfield assets. “But those assets are the same in nature. We do not go off-road by investing in greenfield assets. That simply involves buying into projects at an earlier stage, involving more risks expected to deliver better results if allocated and managed appropriately.”
“We do not go off-road by investing in greenfield assets. That simply involves buying into projects at an earlier stage, involving more risks expected to deliver better results if allocated and managed appropriately.”
The fund format still remains the most desirable way of accessing this asset class, according to Lafleuriel. “Doing an infrastructure investment as a direct investor involves a lot of work, requires a lot of commitment not only to transact, execute and manage deals and projects, but to also source and build the right connections and network to uncover deal opportunities.”
This article features in HedgeNordic’s “Private Markets” publication.