Tread more cautiously in PE-infra overlap – AVCJ Forum

Investors with varying definitions of infrastructure as an asset class in terms of risk and cash flow appeared to agree that while some overlapping with private equity strategies was necessary, there were risks around driving up competition and valuations.

The balancing act – discussed both in terms of direct investments and fund commitments – is seen as becoming more complicated in an environment of rising inflation and interest rates.

“On directs, we’ve had examples where the risk-return profile was attractive for both the private equity and infrastructure teams. But of late, the cost of capital has become a separator for whether something is pursued by private equity or infrastructure,” said Nicole Goh, head of infrastructure for Asia ex-China at GIC.

“In the current climate, we will see more of a renewed focus by infrastructure GPs on making their core-plus businesses more infrastructure-like. And on the private equity side, if they have an infrastructure GP as an exit strategy for their portfolio company, they’re probably going to have to wait.”

GIC has a risk-based definition of infrastructure that is not limited to hard assets with requirements around high barriers to entry, being an essential service, having relatively predictable cash flow yields, and, increasingly, the ability to pass through inflation increases.

Goh identified success cases for assets transitioning from private equity to infrastructure such as including telecom towers. But in light of the current macro backdrop, she advised caution on newer asset types still yet to fully transition.

Newer players in the sector have baked asset class ambiguity into their mission statements. For example, Asian Infrastructure Investment Bank (AIIB), a development finance institution founded in 2016, defines its mandate as infrastructure and “other productive sectors,” including a spectrum of PE-targeted industries that support national economic growth.

Thomas Walenta, a senior investment officer at AIIB, highlighted healthcare as an example of an area of interest, where a traditional focus on brick-and-mortar infrastructure assets such as clinics has expanded to include life sciences, pharmaceuticals, and diagnostics.

AIIB’s activity in this theme includes a USD 30m commitment to China’s digital-focused Legend Capital Healthcare Technology Fund. Walenta noted that part of the rationale for such moves could be seen in digital assets’ relative resilience during recent market dislocations.

“The advantage of having good private managers is they have the flexibility to actually accommodate certain trends and react to certain developments. So, in that sense, that flexibility is in the interest of the LPs,” he said.

“However, it shouldn’t be necessarily a sustained blurring because I do think for LPs, it gets more and more difficult for their own asset allocation to be entirely clear where they have their assets allocated if everything is a mix.”

A similar phenomenon of strong investment demand from both PE and infrastructure investors underpinning resilient valuations amidst a broader market downturn is observed in climate-related assets.

Valerie Speth, an Asia-focused managing director in Blackrock’s climate infrastructure group, said that while valuations in this space have begun to correct, there remained significant questions around the skillsets of interested parties.

She described a trend where investors once focused exclusively on operational renewable energy plants have begun to seek additional upside by exploring unfamiliar segments of the value chain such as construction finance.

“Now, we see everywhere, even in really early stage, investors are willing to take that risk. You need different skills to manage such companies. I think it will show who has the right capabilities to support these companies to grow and put frameworks in place to tackle that growth,” Speth said.

“Everybody knows the investment opportunity is there, but the question is, how do you unlock it?”

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• Topics
• Infrastructure
• Technology
• Healthcare
• Industrials
• GPs
• LPs
• Cleantech
• Asia
• GIC Private
• Asian Infrastructure Investment Bank
• BlackRock
• renewable energy