Judging by the reactions of most industry observers and publications, the takeovers of Global Infrastructure Partners and Actis by BlackRock and General Atlantic, respectively, were anything but expected.
While private infrastructure as a distinct asset class has seen a meteoric rise over the past decade and a half – last year it became a $1 trillion asset class – very few market participants expected the dynamics unfolding with those two major transactions.
So, what drives these two deals – which some market observers have interpreted as heralding a new wave of market consolidation and the end of the independent infrastructure fund manager – and their almost simultaneous timing in early January?
Size certainly matters in the infrastructure investment management world, even more so than in any other real asset classes. However, the key drivers for both transactions have deeper roots.
Relatively low return volatility certainly is the major attraction for large asset managers with an investor base keen to anchor their portfolios. Very few real assets can command the same stable, relatively predictable and cycle-independent returns infrastructure assets offer along with a certain degree of inflation protection and relatively high barriers to entry.
Apart from the overall portfolio benefits, however, there are several other elements that make infrastructure the star among other private market allocations for years to come.
Market expansion
About 20 years ago when GIP was set up and Actis spun off from what was then CDC (now British International Investment), the UK’s development finance institution, infrastructure was relatively narrowly defined and mainly associated with logistics infrastructure, including ports, toll roads, airports and pipeline networks.
Major technology shifts including industry digitalisation (data centres, fibre optic networks), asset-light business models (tower companies), the decarbonisation of energy generation (solar, wind, battery storage) but also a broader definition of the asset class (social infrastructure, social housing, hospitals) vastly increased the investible universe.
Considering the challenges faced by national budgets in both the developed and emerging world, this trend is expected to continue as governments face demographic challenges, increased defence spending, less welcoming capital markets and other competing objectives.
“Not every infrastructure business plan that looks good on a spreadsheet makes operational sense or is politically palatable”
These trends have been the particular forte of GIP mainly in a developed market context and will most likely continue to be the firm’s main focus. Extracting value by adding private market operational rigour to the management of assets, which were often undermanaged by public shareholders, will most likely continue to be the firm’s modus operandi.
BlackRock’s huge balance sheet should help GIP enjoy multiple advantages in terms of execution speed, bite size, co-investment attraction for outside capital and complex portfolio transactions spanning multiple sub-asset classes, which most other infra fund managers won’t be able to handle.
Actis, meanwhile, benefits from both a broader definition of infrastructure investments, often pronounced in leapfrogging emerging markets, but also an increasing appetite for emerging and frontier market involvement. The potential was highlighted, for instance, by recent institutional investor appetite to tap into the vast pool of stabilised emerging market renewable energy projects, such as BlackRock’s acquisition of a minority stake in the 310MW Lake Turkana wind power project in Kenya.
It will be interesting to see whether General Atlantic will be able to utilise the Actis platform in executing impact-driven investment strategies using dedicated relationships, such as those with Abu Dhabi’s ADQ and IHC, but also by tapping into the vast amounts of impact capital raised, which in some cases would benefit from established execution and management skills like those of Actis.
While the Lake Turkana project exit is commendable, exit liquidity will be GA’s and Actis’s Achilles heels considering the less developed capital market environment Actis’s investee companies typically operate in.
Geopolitical shifts
Where to start in today’s volatile world? The Red Sea and Suez Canal calamities and the inability of Ukraine to use its grain export infrastructure are currently the most visible examples of how fragile global supply chains are.
Considering other potential choke points for the world’s vital flows of energy and goods, such as the Strait of Hormuz, the Strait of Malacca or the Panama Canal, it does not come as a surprise that governments and companies alike are considering alternative routes. This ranges from massive new rail projects across the Middle East, emerging northern shipping routes and also an increasing degree of manufacturing nearshoring.
Related infrastructure projects to, for instance, diversify the East/West manufacturing and consumer relationships with a north/south corridor typically involve public-private partnerships of various forms and shapes.
Given its roots and pedigree within the development finance institutions universe, which often acts as a risk backstop in challenging circumstances, Actis should be well positioned to benefit from the supply chain rearrangement.
The widespread protectionism in conjunction with decarbonisation efforts, especially in developed markets, resulting in massive domestic infrastructure investments, like the IRA or European Green Deal, should be the ideal playing field for BlackRock and GIP considering their pedigree and funding sources.
Asset class still in its infancy
I am rather sceptical with regards to the tectonic market shifts many observers saw when the takeover news broke. Considering the evolution of other private market asset classes like private equity and real estate, infrastructure is still in its infancy. The market will most likely be more fragmented going forward with specialist fund managers and/or combinations of developers, managers and operators carving out particular geographical or specialist asset niches.
The dominance of finite fund structures across the infrastructure investment industry also raises the question of whether a more fundamental structural shift towards a broader use of permanent capital structures will be required to ensure projects can be properly developed and/or restructured without the pitfalls observed in some cases of infrastructure privatisations over the past few years.
Another major challenge for both combinations will be the capital deployment pressure stemming from large infrastructure allocation and a certain need to play catch-up.
All of this will require realistic timeframes, return expectations and not least important, in-house operational skill sets often lacking in the fund management industry. Not every infrastructure business plan that looks good on a spreadsheet makes operational sense or is politically palatable.
It will be interesting to see whether Actis and GIP will be able to sustain their momentum as they mature and become part of larger organisations, which may not always share the same culture of entrepreneurial freedom that allowed them to thrive over the past 20 years.
Martin Schwarzburg is a partner in real assets and financing at Blackcastle, a private markets advisory based in Cyprus