There’s a growing need for new infrastructure and the contribution of private capital will be essential

Interview with Christoph Holzer, Managing Director at Allianz Capital Partners, by Mauro Meggiolaro

1. What is the purpose of Allianz Capital Partners?

Allianz Capital Partners is focussed on what we call "alternative investments": infrastructure, renewable energies and private equity. We currently manage ca. €23bn in alternative investments, about 3% of all assets under management at the Allianz Group. We don't invest in listed companies, since we don't want to be exposed to the volatility of capital markets. We prefer to invest directly in the capital of companies or joint-ventures that develop infrastructure projects. We are normally an equity sponsor through the acquisition of minority stakes. This is what we did, for example, with Autostrade per l'Italia, where we currently own 6.94% of the shares in a consortium with other investors.

2. What are the key elements that underpin your investment decisions in the infrastructure sector?

We can identify at least six key factors for our investments in infrastructure projects: a) the focus on physical assets that represent essential services for local communities; b) very long-term operating rights; c) a stable and transparent regulatory and contractual framework; d) strong and stable cash flows over a long period of time; e) strong downside protection, i.e. the high likelihood that at least the invested capital will be repaid ; f) the compliance with environmental, social and governance criteria. Since we invest the money of pension schemes and insurances of regional Allianz companies (German, Italian, French, etc.), we are clearly a long term investor, with a "buy and hold" approach, which needs regular cash flows in order to match pension and insurance liabilities when they are due.

3. How are you currently positioned regarding the infrastructure sector? Do you envisage to adjust the weighting of this sector upward or downward?

As I mentioned, Allianz's weighting of the infrastructure sector is currently ca. 3% of the total invested assets. This percentage is expected to substantially rise over the next 5-10 years and this for a very simple reason: when they meet the criteria that I listed before, investments in infrastructure provide long term, stable cash flows and are a perfect fit for the long term liabilities of a global insurance group such as Allianz.

4. Governments have increasingly cut their investments in infrastructures over the last 10 years. As a consequence, much of the world's economic infrastructure is now resting in the hands of specialist private investors. How do you evaluate this trend?

The increasing involvement of private investors in the infrastructure sector is a quite natural process and a consequence of two main factors: increasingly tight public budgets due to record high debt-to-GDP ratios, following the latest financial crisis, and a growing need for new infrastructure, especially in emerging markets, or the refurbishment of existing ones, in particular in developed countries.

We are very positive about this trend because, even if it is true that governments can partly rely on cheap funding, they often don't have the capability to structure and manage very complex projects or monitor them over a long period of time. Our role as private investor has become more and more crucial over the last years: our company has now a staff of over 100 people and we understand ourselves as reliable financial partners for governments and regulators in a new environment, where public private partnerships have become a common practice. 

5. Do you see any obstacles to a larger employment of private capital in this sector?

I think that the main obstacle is often the lack of a transparent, stable and reliable regulatory and contractual framework. This is essential considering that many infrastructure projects have an amortisation period of 30-40 years on average. The Thames Tideway (sewage) Tunnel in London, in which we are the major investor with a 34% stake, has an expected lifetime of 120 years. If the governments decide to change the rules for the investments retroactively, the whole cash flow structure is jeopardised. This has happened, for example, in the renewable energies sector in Spain and in Italy, where tariffs have been cut not only for new projects but also for ongoing investments. In general, European governments - with the exception of Great Britain which is at the forefront for what concerns the attraction of private capital - aren't as open as they could be towards public private partnerships: they just underestimate what private capital can bring. And this so far has limited new investment opportunities in several developed markets.

6. Which are currently the main infrastructural gaps in Europe in your opinion?

Europe has decent infrastructure compared to other regions. However, these are aging and need to be renewed. The power sector, in particular, is increasingly under pressure because the whole value chain is dramatically changing due to the more and more crucial role of renewable energies in the production mix, the digitalisation of households and the improvement of battery storage technologies, which help decentralising the generation and supply of electricity. Europe is in desperate need of new, interconnected electricity grids that are more flexible in comparison to the existing ones and are able to support a paradigm shift in the sector.

We are currently planning the investment in an offshore electricity interconnector between Germany and the UK, in which Allianz will hold a 26% stake. The project, called "NeuConnect", will make it possible to transfer excess electricity produced by wind turbines in Germany to Great Britain through a subsea cable that will have a capacity of 1.4GW and a total length of some 650km.

7. How do you integrate environmental, social and governance matters in the evaluation of companies and projects in the infrastructure sector?

ESG (environmental, social and governance) criteria are a key part of our investment assessment and are fully integrated in our due diligence process. For an infrastructure investment, this means that we look first of all at the potential environmental impacts and how these are managed. If we see that risks are not being addressed or managed properly, we will consider declining the investment or proceeding with great care to require those involved in the project to take additional actions in order to ensure a proper mitigation of the ESG risks. The Allianz Group has clear guidelines as far as investments in infrastructure are concerned. Infrastructure-related investments are screened on a number of criteria, including biodiversity risks, upstream/downstream impacts, anti-corruption procedures, risks to local communities and protected areas as well as reputational risks.

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