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.
2. Has the increasing interest in infrastructure securities been within the realms of the equity weighting of a portfolio, or have you seen it more as a liquid alternative, private equity style investment?
Infrastructure Securities Funds should be viewed as thematic equity funds, rather than a liquid form of private equity (Brookfield Infrastructure Partners and 3i Infrastructure plc would fall into that category). The intent of thematic funds is to offer investors a way to harness secular growth themes. The most popular thematic funds typically encompass themes with promising futures, such as artificial intelligence, disruptive innovation, robotics, cybersecurity, the energy transition, genomics, blockchain and the explosion of data. The infrastructure theme has gained significant traction over the past five years, with many large investment managers now offering an infrastructure securities fund.
3. How does Quaero Capital’s Infrastructure Security Fund stand out from the crowd?
Most importantly, we were the first of the funds to focus on growth stocks within the infrastructure universe. When bond rates were low, infrastructure funds were sought as a source of yield. Low growth, high yielding water, gas and electricity utilities were the focus. However, ever since the US Federal Reserve began “tapering” back in 2017, we focussed on infrastructure stocks that were reinvesting their cash flow in high return projects rather than paying out dividends. For years now, we have focussed exclusively on infrastructure growth stocks, which means our allocation is far away from the infrastructure indexes and competitors, which has held us in good stead. Based on this, our performance should be well ahead of the index and competitors.
4. Can you give examples of the type of infrastructure you have been investing in?
We are focussed on investment tailwinds, and there is no shortage of these in quoted infrastructure today. The energy transition if probably the major investment theme of the decade, and infrastructure is in the sweet spot. We are focussed on the electricity transmission and distribution companies that connect renewable energy sources to the expanding base of power users, the companies that own and operate the networks of wires, if you will. The explosion of data related to 5G and AI is the other tailwind of the decade, and there we invest in the enablers: the picks and shovels such as telephone towers and data centres. The demand for clean water and sustainable waste management is another tailwind we are focussed on. It is going to be a great decade for these types of growth infrastructure.
5. What happens if Trump gets back in – he promised plenty of infrastructure investment last time round and failed to deliver. Will this time be any different?
Actually, President Biden delivered the initial Trump plan, signing the USD 1 trillion Infrastructure Investment and Jobs Act in 2021, which is now just starting to be deployed. Since then, he signed the Inflation Reduction Act of 2022 which provides USD 900 billion for a variety of initiatives, particularly investing into domestic energy production while promoting clean energy. This has been a major incentive for the roll-out of wind and solar electricity development in the US and has provided the nuclear power industry with critical support. Trump and Nikki Haley have both derided the bill, and Trump has been highly critical of the offshore wind industry (as if it needed any new problems). In discussions we have had with the beneficiaries of the bill, it appears highly unlikely that either candidate will attempt to repeal the bill (which benefits “red” [note: republican] states disproportionately), but implementation of certain aspects can be delayed. Whilst the US fossil fuel industry will find more support under Trump, we think that renewable development and the massive investment required for upgrading electricity transmission and distribution networks in the US will continue at pace since these assets are too old and the grid under too much pressure to remain in their current state.