Infrastructure in a Low Cost of Capital Environment: Challenges and Opportunities
Atlantia SpA’s investor briefing in London on October 19 featured a round table on sector challenges in an era of low interest rates. An edited transcript of the discussion -“Infrastructure in a Low Cost of Capital Environment: Challenges and Opportunities”- follows.
Thomas EbhardtSenior Reporter at Bloomberg News - Moderator
Giovanni Castellucci, Chief Executive, Atlantia Group
Chantale PelletierRegional Director Investment, Europe and Special Projects Infrastructure Group atCaisse de dépôt et placement du Québec
Marco Camisani-CalzolariMegashout.org - CEO, Digital Evangelist
Walter GubertVice Chairman JPMorgan Chase&Co and Chairman EMEA
Philip IleyGlobal Infrastructure Partners – Principal
Ebhardt: This panel will be about infrastructure and what's going to happen in this low cost of capital environment. Feel free to give a more futuristic point of view on how self-driving vehicles and the like will impact the infrastructure business not tomorrow, but perhaps the day after. Let’s start with Mr. Castellucci: is this a golden age for infrastructure spending?
That golden age is a dangerous perception. We are never in the golden age. There will be some winners, of course, but nobody can expect to be the winner because only a few will win.
In this golden age of low cost of debt, the winners will be good, high-quality assets. The winners will be the operators – in managing, improving or controlling - able to add value over the cost of capital. It will not be the golden age for controversial assets with operational risks because, simply, the golden age will finish. So this is a golden age for operators that are resilient to the risks that could come down the road. That road will be bumpy, and good assets will be less so. That’s why I believe that leverage is something that can be played if you are capable to cover financing and rollover risks for a long while. Even in a low-rates environment, increasing leverage when one cannot match the duration of one’s assets and liabilities means you’re taking unreasonable risk. I believe the market will remain selective. The risk is that the perception of a golden age means there are as many willing buyers of not-so-good assets as there are of good ones. This is why we need to focus, be picky.
Chantale Pelletier, you are clearly a long-term investor. Can you tell us some of your selection criteria today, and how you see that evolving in the coming years amid this particular competitive environment? We recently saw GIP sold City Airport at a level some analysts thought was quite high, meaning it won’t be as easy as anticipated for the buyer to make a profit. How do you see it going on?
You are right to say there's a specific macroeconomic situation that's driving the price upward, and so in a supply-and-demand kind of way may also be pushing prospective returns downward. That’s mainly due to a lot of investors having kept their powder dry and renewed interest in infrastructure. Allocating more resources and assets to the real economy is encouraging to an investor like us.
We have two pillars to help us navigate. The first one, in line with what was just said, is discipline, which is something we’ve had for the 15 years. We always base our investment on long-term partnerships with top-tier industrial players. The other one has to do with geography and diversity. Local content is really important and we’re always looking for who has the expertise. High quality assets are important as noted, but at the same time we, like anyone else, need to be agile. Low market yields mean we’re willing to increase how much capital we put to work but we need to have diversification in terms of geography, in terms of how deals and transactions are structured and so on. So we may be putting something in place in the North American wind sector while also looking at the gas sector in Europe. Operational leverage is as important as financial leverage.
Mr. Iley, you just joined Global Infrastructure Partners and so are also on the investor side in this very liquid market. Can you tell us what you are looking for at the moment?
I think GIP's main focuses have stayed the same now for the best part of a decade: they like asset longevity. That means core sectors are energy transmission, transport, airports, ports, heavy rail, water and waste. It’s very visible that these are attractive right now, so it’s about creativity and flexibility – you can’t just wait for an opportunity to turn up. You have to think about just which characteristics you want to deploy resources on. For example, is a shocking low deal flow for an enormous amount of capital in pure-play infrastructure opportunities.
So duration is the first thing. We are a closed end fund, so you have to have decades of visibility on the earnings – that allows you to get out of whatever you get in. That means regulation, policy, governance and value are key. But those are thresholds; the biggest thing once they’re passed is operational upside. We have to be able to dramatically improve the performance of the business.
Mr. Gubert, you are on the banking side. A recent global estimate from McKinsey said there is a shortfall of at least one trillion a year in infrastructure spending that is not happening, often because the one willing to spend is not connected to the one who needs it. What is the role of the banker in this environment, and how can you help mesh the two sides?
One of our functions is to help our clients curve their excitement because I think this is a golden period. McKinsey projects 57 trillion in infrastructure spending between now and 2030. We’ve seen monetary policy at work, but not stimulus, and this will have to change with interest rates where they are. Obviously for investors the role of money is huge. We talk to big investors and many of them say they plan to move up their allocation to infrastructure form, say, 10% to 15%. Given the amount of money available, that five percent extra is a huge number, which creates a clear challenge. Look at 2015: the volume of infrastructure rose 350 billion year on year, so 10%. GDP grew 2.4% globally, which is quite a gap. So yes, we see a great opportunity in terms of growth in markets, growth from new deals, transitioning out of closed-end funds and entering new areas.
Mr. Camisani, we’ve heard of the need to focus on the long term. So given all the talk of disruptive change in the landscape, such as autonomous driving, what do you think is going to change in the next 15 years? How will self-driving vehicles impact highway and traffic trends?
It's not easy to see the future. Maybe we can see 10 years ahead, but digital is so fast, it’s faster than us. The real limit for the future is the people, because we tend to have habits, we are very slow because we are humans. Driverless cars are coming, to be sure. In fact they’re already here; you see Uber in Copenhagen using them already and you can try this nice experience.
Let’s remember that, before driverless cars there are robots. Actually a driverless car is a kind of robot. As we know, in the next 10, 15 or not-so-many years a robot will steal maybe half of our jobs. Think of a train. It can only go straight, and it can go very fast. I see a future where for example a lone line of cars or trucks cross a country with only 20 centimeters between them, traveling at 100 miles per hour. It might look like a long train.
Mr. Castellucci, are you prepared to have that on your highways? That sounds like quite a challenge!
Are the drivers prepared to have a driverless car driving in the middle of the lane? This is the issue. The real problem is the combination and the compatibility of two ways of driving.
But let me say something more long-term. If you look at the dynamics of transportation over a century, we have seen an increase in the market share of individual transportation versus public transportation. That has been very, very strong and it's still there. In Italy, a country that has invested tens of billions of euros for high-speed rail, we are still gaining market share versus train because cars are freer – they are well-managed because they are self-managed. In fact, we are investing a lot in solving bottleneck problems around big cities because we are still gaining market share versus rail. All these new technologies, such as self-driving cars, will make
individual decisions and transportation more practical and less expensive.