Transforming infrastructure
Stay calm and stay diversified
Macroeconomic volatility, geopolitical challenges and the disruptor of all disruptors, artificial intelligence, are creating an unprecedented level of noise and complexity. Investors that avoid emotional reactions, instead prioritising diversification and a focus on long-term fundamentals, are better positioned to navigate whatever the future may bring, says Marta Perez, CIO Infrastructure at Allianz Global Investors.
What investment risks and opportunities is the deglobalisation trend creating within the infrastructure asset class?
We’ve witnessed volatility relating to geopolitical tensions, supply chain disruptions and shifting regional policies for some time now. What’s interesting, is how investors are responding to the deglobalisation theme.
On the one hand, we see a degree of retrenchment to domestic markets. There’s a sense that what’s happening in the US might replicate itself in Europe too. For example, investors wanting to back regional resilience and ‘Make Europe Great Again’. On the other hand, we still see a desire for global diversification.
US investors, for instance, have seen how valuations have corrected in Europe. They also recognise that there are fewer opportunities around the energy transition in their home market today. This is driving appetite towards Europe among US investors as well.
As an asset manager from Europe with a global presence, our advice to clients is to avoid reacting emotionally to headlines. Rather, they should design portfolios that can not only cope with the kind of volatility that we’re currently experiencing but actually benefit from it.
What that means for us as a long-term investor, is sticking to the fundamentals – ensuring that we’re backing high-quality assets and long-term contracts with stable counterparties. We don’t see deglobalisation as a short-term trend. It’s a structural shift, and so this long-term approach is what allows us to sleep better at night.
Where do you see the most interesting investments in decarbonisation today?
The energy transition is undoubtedly one of the most exciting investment opportunities for us as a firm. In fact, we’re celebrating the 20th anniversary of our first investment in renewables this year. We acquired an Italian wind farm all the way back in 2005. I think that shows how much of a pioneer we’ve been and how important the sector is for us.
Over the past 20 years, we’ve seen a significant change in the definition of energy transition investment. Today, we see a lot of opportunities in energy storage, for example, as well as grid infrastructure, sustainable fuels and more recently green hydrogen. Among our most interesting investments in the space has been NeuConnect, the first ever energy interconnector between Germany and the UK. We’ve also participated in a UK pipeline to support water infrastructure sustainability and made equity investments in green hydrogen platforms, which represent the next frontier of the energy transition.
In terms of geography, Europe is leading the energy transition market with respect to both investor appetite and regulation. That’s changed somewhat over the past couple of years. The Inflation Reduction Act was very powerful in attracting private sector money. Now Europe is taking a similar policy driven approach.
We’re also seeing the energy transition creating opportunities in other parts of the world. We’ve deployed around $4 billion in Latin America in recent years, around half of which has been energy transition related. We’ve also been active in Asia. Decarbonisation and the energy transition have definitely become global themes.
How do you view digitalisation, particularly in light of the acceleration of AI?
We made our first investment in digital infrastructure over a decade ago. Digital infrastructure is an investment theme that’s kept us very busy over that time. It’s definitely shifted from the fringes to the mainstream in recent years.
The drivers of demand are clear and there’s no doubt that the demand isn’t transient. Digital infrastructure is now a critical backbone of modern economies. We’re supporting this development and have invested in digital infrastructure spanning fibre networks, telecom and mobile towers, and data centres while delivering attractive returns to our clients.
Competition has intensified materially. There’s a lot of capital chasing a limited number of quality projects. That’s especially true when it comes to greenfield data centres. We’ve therefore decided to focus firmly on stabilised data centres, with proven operators and long-term contracts. Afterall, if there’s one thing that is certain with digital infrastructure, it’s how quickly things can change. The technology is evolving rapidly and so too is user behaviour. When we make an investment, we need to be sure that what works today will be the same in ten or even 15 years’ time.
We see others in the market looking at opportunities that could offer amazing returns but are not contracted, for example. Given the type of investors that we work with, that’s not an opportunity for us. We think it’s essential to take a highly disciplined, research-driven and long-term approach.
Examples of recent investments we’ve made in the sector include the acquisition of a stake in global hyperscale data centre platform, Yondr Group. What’s interesting with that investment, is that it was made out of our core infrastructure portfolio. That would not have been the case a few years ago.
How is the democratisation trend manifesting itself in the infrastructure space?
This is a fascinating development. Investors in infrastructure have historically been the big institutions – pension funds, insurance companies and sovereign wealth funds. Over the last few years, however, we’ve seen increased interest from wealth managers, high net-worth individuals and even retail investors.
And I think the reason behind that is simple. Infrastructure, unlike many other asset classes, is something that everyone can understand. These are tangible assets and investors feel like they’re contributing to the real economy, while also benefiting from steady cashflows.
Of course, infrastructure assets can be complex, illiquid and long-term in nature. The market has had to respond with regulation and fund structures that can accommodate this new group of investors. We ourselves launched an evergreen vehicle last year. These partnerships that are forming between infrastructure asset managers and wealth management platforms are marrying investor needs with investment opportunities in a responsible and scalable way. I think this is really exciting to the concept of global infrastructure needs.
Estimates vary, but everyone agrees that the need for investment is vast. Traditional institutional money alone simply isn’t enough to bridge the gap that exists. Therefore, it’s fantastic that we have these different pockets of capital emerging. Meanwhile, on a personal level, I love the idea that individuals can be part of the economic transformation of countries whilst also contributing to their own pensions. It’s the ultimate win-win.
What really excites you about the years ahead?
These are exciting times, undoubtedly. But they’re also complex times. It’s important that investors understand what they’re getting into. There are opportunities but it takes good partnerships and expertise to identify the right ones.
An experienced partner by your side can make the difference. Allianz Global Investors is not only one of the leading infrastructure managers in the world, with more than €50 billion in AUM, but also has one of the longest track records in private markets at over 25 years. We’ve seen an awful lot in that time. The past five years in particular, have been characterised by a global pandemic, war in Ukraine and high inflation. And yet our portfolio has remained robust.
Our mantra through all of this is to keep focus, stay calm and diversified. Don’t let short-term noise derail your long-term strategy – keep your eye on the prize. If you stick to those fundamentals, and do your due diligence, you should be able to cope with whatever comes your way.
How can investors reconcile a technology that’s as new as green hydrogen with infrastructure investment characteristics?
It’s useful to think about where wind and solar were 20 years ago. I don’t think anyone could have envisaged back then that we would be where we are today. For a lot of people, green molecules seem like science fiction. But many would have thought the same about wind turbines a few decades ago. Those wind turbines are now an established part of our landscape.
As the regulatory frameworks around these emerging technologies become more established, I think we’ll see more deployment in these sectors. Certainly, when I think about the energy transition overall, there’s no doubt that it remains one of the most exciting and important themes for us as an infrastructure manager. The fact that we have over two decades of experience investing in the space means we’re ideally positioned to take advantage of the opportunities that lie ahead.
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