Future Returns: Investing in Private Infrastructure
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Future Returns: Investing in Private Infrastructure

The sector also is expected to continue growing given the considerable global needs.

Wed, Aug 18, 2021 11:54amGrey Clock 4 min

The amount of financing required for global infrastructure projects is estimated by McKinsey & Co. to be US$3.7 trillion annually through 2035—a daunting figure, but one that creates potential opportunities for wealthy investors.

That’s because investing in infrastructure assets through privately managed funds can deliver higher yields and better potential returns than other asset classes, according to J.P. Morgan Private Bank.

The sector also is expected to continue growing given the considerable global needs in a wide variety of projects, the bank says. McKinsey’s definition of infrastructure includes everything from what traditionally has fit that category—such as roads, bridges, airports, and power-generating utilities—in addition to more “new world” infrastructure, such as data and communications and renewable energy sources.

“Covid accelerated our clients’ understanding of this space, particularly as remote work made data and access to reliable communication essential,” says Kristin Kallergis, the private bank’s global head of alternative investments. It also showed the value of other new world forms of infrastructure, such as education and healthcare facilities.

J.P. Morgan estimated in a briefing for clients that private infrastructure assets have provided annual yields of about 7.2%. One reason is because some infrastructure projects, such as utility assets, are regulated and offer long-term, predictable cash flows, Kallergis says.

In the next 10 to 15 years, private infrastructure assets can realize a potential return of 6.1%, according to a September 2020 analysis by the bank.

Penta recently spoke with Kallergis about why investors may want to think about investing in private infrastructure assets today, and the type of opportunities it pursues.

Searching for Yield

Beginning late last year, J.P. Morgan Private Bank began speaking with its clients about a “reimagined 40%,” referring to the 40% allocation to fixed-income securities in a standard portfolio of 60% stocks, 40% bonds. With interest rates at rock-bottom levels, it was time to think about where else clients could get extra income.

Much of how the bank reimagined this 40% was through investments in private market alternative securities, such as real estate, a select number of hedge funds, and “a big piece was infrastructure,” Kallergis says.

The bank had an infrastructure fund on its investment platform for clients for several years, but with institutional minimums of US$2.5 million or more.

This year, the bank lowered those minimums, realizing that even the wealthiest of families interested in investing in infrastructure might prefer to start small to learn the asset class and to see how it performed, she says. The strategy worked.

“This year alone, we quadrupled the flows in that fund,” Kallergis says.

How to Invest in Private Infrastructure

For wealthy clients, there are four basic strategies for infrastructure investing, ranging from “core” funds, which have predictable cash flows that can be forecasted for a decade or more, to “core-plus” funds, which have those predictable cash flows but have some riskier element to them, Kallergis says.

For instance, core-plus funds often use slightly more leverage, such as a loan-to-value ratio of about 50%, Kallergis says.

These structures typically require investors to lock up their cash with the fund for two-to-four years, and then semi annually after that. Unlike a private equity fund—which asks investors to put up their committed capital over a period of time—once invested in a core-plus fund, investors have to put in 100% of their capital, Kallergis says. While returns in these funds may be lower than private equity, that 100% of capital begins compounding immediately.

The core-plus funds J.P. Morgan has allocated to for clients have realized net returns ranging from about 7% to 9%, with 6% to 7% of that delivered in yield—making them more of an “income play,” she says.

Value-added funds include assets that are more exposed to market-price risks and/or require “improvements or stabilization,” the bank wrote in a market update on the sector. There are few managers with this approach, however, Kallergis says.

For investors willing to shoulder more risk, there are “opportunistic” funds that are more akin to private equity and can generate net 15% returns.

“You are not getting the cash flow yield in the opportunistic bucket, but similar to how we love opportunistic real estate, we feel the same about infrastructure in terms of what it can add to the portfolio,” she says.

Until recently, most of the opportunistic income funds were invested in emerging market projects. But even for funds invested in great assets, emerging markets pose currency risks, meaning there is potential for everything invested in these funds in dollar terms to depreciate. India and Brazil, for example, have been “places with great infrastructure needs, a great investment thesis—but you had to be mindful of the risk you were taking from a currency perspective,” Kallergis says.

Little Boost Expected from Legislation

J.P. Morgan likes opportunistic funds for the diversity, income, inflation-protection, and yield, or DIIY, they provide.

Diversity refers to the low correlation infrastructure funds have to other sectors of the market, including real estate. The yield, Kallergis adds, is likely to be more and more of a factor in this space as more renewable power projects are financed.

While the nearly US$1 trillion infrastructure bill that passed the U.S. Senate on Aug. 10—and still needs to clear the U.S. House of Representatives—would spur spending on a range of projects, it wouldn’t “change the game for infrastructure investing,” Kallergis says.

What it does is allow more investors to learn about infrastructure and “whether they should have a piece in their portfolio,” she says. Given the great needs in the U.S., “most people are excited about what’s to come.”

Reprinted by permission of Penta. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: August, 17, 2021.


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Government spending, including Biden’s Inflation Reduction Act, has helped drive a gap between clean-energy spending and fossil-fuel investments

Thu, Jun 1, 2023 3 min

Investments in solar power are on course to overtake spending on oil production for the first time, the foremost example of a widening gap between renewable-energy funding and stagnating fossil-fuel industries, according to the head of the International Energy Agency.

More than $1 billion a day is expected to be invested in solar power this year, which is higher than total spending expected for new upstream oil projects, the IEA said in its annual World Energy Investment report.

Spending on so-called clean-energy projects—which includes renewable energy, electric vehicles, low-carbon hydrogen and battery storage, among other things—is rising at a “striking” rate and vastly outpacing spending on traditional fossil fuels, Fatih Birol, the IEA’s executive director said in an interview. The figures should raise hopes that worldwide efforts to keep global warming within manageable levels are heading in the right direction, he said.

Birol pointed to a “powerful alignment of major factors,” driving clean-energy spending higher, while spending on oil and other fossil fuels remains subdued. This includes mushrooming government spending aimed at driving adherence to global climate targets such as President Biden’s Inflation Reduction Act.

“A new clean global energy economy is emerging,” Birol told The Wall Street Journal. “There has been a substantial increase in a short period of time—I would consider this to be a dramatic shift.”

A total of $2.8 trillion will be invested in global energy supplies this year, of which $1.7 trillion, or more than 60% will go toward clean-energy projects. The figure marks a sharp increase from previous years and highlights the growing divergence between clean-energy spending and traditional fossil-fuel industries such as oil, gas and coal. For every $1 spent on fossil-fuel energy this year, $1.70 will be invested into clean-energy technologies compared with five years ago when the spending between the two was broadly equal, the IEA said.

While investments in clean energy have been strong, they haven’t been evenly split. Ninety percent of the growth in clean-energy spending occurs in the developed world and China, the IEA said. Developing nations have been slower to embrace renewable-energy sources, put off by the high upfront price tag of emerging technologies and a shortage of affordable financing. They are often financially unable to dole out large sums on subsidies and state backing, as the U.S., European Union and China have done.

The Covid-19 pandemic appears to have marked a turning point for global energy spending, the IEA’s data shows. The powerful economic rebound that followed the end of lockdown measures across most of the globe helped prompt the divergence between spending on clean energy and fossil fuels.

The energy crisis that followed Russia’s invasion of Ukraine last year has further driven the trend. Soaring oil and gas prices after the war began made emerging green-energy technologies comparatively more affordable. While clean-energy technologies have recently been hit by some inflation, their costs remain sharply below their historic levels. The war also heightened attention on energy security, with many Western nations, particularly in Europe, seeking to remove Russian fossil fuels from their economies altogether, often replacing them with renewables.

While clean-energy spending has boomed, spending on fossil fuels has been tepid. Despite earning record profits from soaring oil and gas prices, energy companies have shown a reluctance to invest in new fossil-fuel projects when demand for them appears to be approaching its zenith.

Energy forecasters are split on when demand for fossil fuels will peak, but most have set out a timeline within the first half of the century. The IEA has said peak fossil-fuel demand could come as soon as this decade. The Organization of the Petroleum Exporting Countries, a cartel of the world’s largest oil-producing nations, has said demand for crude oil could peak in developed nations in the mid-2020s, but that demand in the developing world will continue to grow until at least 2045.

Investments in clean energy and fossil fuels were largely neck-and-neck in the years leading up to the pandemic, but have diverged sharply since. While spending on fossil fuels has edged higher over the last three years, it remains lower than pre pandemic levels, the IEA said.

Only large state-owned national oil companies in the Middle East are expected to spend more on oil production this year than in 2022. Almost half of the extra spending will be absorbed by cost inflation, the IEA said. Last year marked the first one where oil-and-gas companies spent more on debt repayments, dividends and share buybacks than they did on capital expenditure.

The lack of spending on fossil fuels raises a question mark around rising prices. Oil markets are already tight and are expected to tighten further as demand grows following the pandemic, with seemingly few sources of new supply to compensate. Higher oil prices could further encourage the shift toward clean-energy sources.

“If there is not enough investment globally to reduce the oil demand growth and there is no investment at the same time [in] upstream oil we may see further volatility in global oil prices,” Birol said.


Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual

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