1. You have worked for several major banks in your time in finance. How have you seen the development of alternative assets, such as private equity and infrastructure, developing in private client portfolios?
Alternative assets such as private equity are now very much in focus for private clients. When I was responsible for private equity at Lombard Odier, buy-out and venture capital funds were sought after, but had to be specifically structured for private clients. Now private investors are also exploring infrastructure, property, credit, and secondary private equity in an attempt to diversify their portfolios. Challenges such as liquidity and institutional structures are now being addressed.
Global infrastructure stocks’ performance stood in contrast to broader equity markets in 2023, which rose on the strength of just a few sectors, led by technology (which rallied sharply on optimism surrounding advancements in artificial intelligence).
We have been hearing for 20 years that the electrical infrastructure in the United States is obsolete, (with an average age of 40 years), and the long-awaited wave of investment is still to come. Europe is the same, with an ageing infrastructure (also 40 years old on average, according to a European Union report). Against this backdrop, we believe that infrastructure offers an investment opportunity.
The rise in interest rates in 2023 has had a negative impact on the infrastructure sector, whose valuation is often closely linked to the discount rate used to assess its value. As a result, the indices concerned underperformed, with the S&P Utilities falling by 10% over the year, compared with a rise of the same order for the Dow Jones Industrials. For its part, the global infrastructure index only just managed to end the year in positive territory (+1%). We are therefore satisfied with the performance of our infrastructure fund, which posted a result of +5.1% for the year 2023, overperforming its benchmark* by 2.9 percentage point.
Infrastructure companies provide the physical framework essential to the smooth running of a community. Utilities, transport, energy, schools, hospitals, as well as communications, water and waste treatment, all provide the framework conditions that are essential to the smooth running of our modern society.
Naturally, societal transformations go hand in hand with the upgrading of the infrastructure that underpins their development.
QUAERO CAPITAL has made significant investments in the infrastructure sector, both in listed infrastructure and in the financing of projects in private markets. This asset class offers a number of advantages in terms of both the nature of the investments and the specific characteristics of the sector. In any case, including a portion of infrastructure in a diversified portfolio seems very appropriate in the current environment.
Infrastructure is an attractive asset class overall for a number of reasons: diversification in portfolios, contractual and regular cash flows, resilience over the economic cycle (low beta), vital importance to society (digital and energy transition) and the benefits of longevity.
Protection against inflation
Investors also often see the infrastructure asset class as a good way of hedging against inflation. One of the main characteristics of this sector is that the companies in question often benefit from price indexation formulas built into their contracts. But the definition of infrastructure continues to evolve and its scope to expand. It is therefore essential to take a nuanced view of each asset to check whether it really has the usual characteristics of the infrastructure sector.
Current announced infrastructure spending plans make it the “number one” sector for global capital investment over the next ten years. Although, the infrastructure sector is intrinsically environmentally challenging in terms of greenhouse gas emissions, environmental pollution, habitat destruction and species extinction, we also believe there is an immense opportunity to promote responsible investment in this sector.
China’s ambitious ‘New Silk Road’ project aims to build road, rail and sea transport infrastructure, power grids, oil and gas pipelines in 78 countries in Asia, Africa and Europe. However, despite the enormous scale of the project, it is very difficult for foreign investors to participate. Fortunately, other public initiatives in the US, Canada, Europe, Australia, New Zealand and the UK offer alternatives for infrastructure investment.