The US$150 billion opportunity opening up to Australian investors
The following was written and published on Livewire on 25 May 2023.
For Ares Management Corporation’s Andrew Pike, it’s all about the value-add that funds can bring to their clients.
With a US$150 billion addressable market in the US alone, essential infrastructure has quickly become an asset class too large to ignore. From the farms of Wisconsin to the wind farms of California, creating infrastructure to support tomorrow’s energy needs is more important than ever. The need for new capacity means new dollars – and with it, new opportunities for the right investor entering at the right time.
And while there are always the publicly-listed equities that have exposure to the essential infrastructure trade, there is a case to be made for investing in climate-focused infrastructure funds.
Ares Management Corporation, the global alternative investment firm, is looking to bring its Infrastructure Opportunities capabilities to Australian investors. Its focus is to add value to sophisticated investor portfolios who want exposure to climate and sustainability-linked thematics without the volatility of public markets.
To discuss the opportunity and why it is available in Australia, I sat down with Andrew Pike, Partner and Co-Head of the Ares Infrastructure Opportunities strategy.
Why invest in a fund and why now?
With a compound annual growth rate of 13%, climate and sustainable infrastructure is growing in leaps and bounds. And Pike says the strong fundamentals of the industry, rather than its more recent tailwinds, are the most exciting part of its investability.
“We believe this is all driven by long-term ingredients or pillars of sustainable growth for a sector, meaning cost, competitiveness, consumer preference, corporate preference and largely positive public policy,” Pike said.
“The total addressable market in need is astounding,” he added.
But given there are infrastructure stocks listed in our own backyard, why should investors go the extra step of investing in a climate infrastructure-specific fund?
“I would say that for our strategy, I believe it would be very hard to find a comparable in the public markets. An investor that is really looking at all facets of climate investing, one that is returning very attractive returns to date, and has the experience and depth in the particular market in which we’re operating,” Pike notes. “Our strategy is defined by our senior management team and not the public shareholder.”
This, of course is in addition to one of the largest benefits that comes with private markets – low correlation to public market returns.
The essential infrastructure opportunity
Pike is quick to emphasise that climate infrastructure is more than just investing in solar panels or hydro-electricity projects.
“Climate investing goes well beyond just renewable energy for us, it also includes resource efficiency, green fuels, the circular economy and services that are required to build and construct and serve big infrastructure,” Pike said.
“Whether that’s advanced recycling technologies like dairy to renewable natural gas or addressing climate accountability and the more efficient use of our natural resources, it is all incredibly important,” he added.
The fund invests almost entirely in North American assets with a heavy preference towards the United States. Australian assets are not currently featured in the fund but could theoretically earn a place. Through its mandate, the fund can invest in a range of asset classes as diverse as structured debt, and private assets.
And, as Pike tells me, that’s incredibly important.
“We can seek equity like returns with being a little bit more flexible with our capital. Why we believe that’s important for investors is it allows us a greater tool set in which to build a portfolio that has more diverse risk and therefore has greater downside protection,” he said.
Pike provides an example of how the fund takes positions in some companies through the preferred equity route and others through common equity. This spreads the risk and allows investors to gain access to the earnings yield on offer. Or, for the more fixed income minded among you, some structured loans don’t carry all that equity risk and may even come with a multi-year exit plan.
“We have the ability to balance the way we construct the portfolio as well as the way we talk to sponsors, it gives us greater flexibility to work with partners,” Pike added.
The environment for private assets
As has become the case with any asset class, all questions about valuations end up coming back to higher interest rates and inflation in general. In the public markets, the impact of interest rates on valuations has been well-written. But in the private markets, valuations are much more sanguine and the picture is much more nuanced.
“We’re a value-add investor, meaning we take great pride in helping build assets and build companies. We’re a little earlier on in the life cycle of an investment,” Pike said.
Pike notes that the choice to invest in the earlier stage of a project or business’ life cycle has a big impact on how rising inflation affects the valuation of those assets.
“Even in an inflationary environment, more capital continues to come into the market, which has a mitigating effect on discount rate migration,” he said. “We’ve actually seen valuations, in many cases, hold pretty consistently year over year.”
Of course, past performance is not a guide, let alone a guarantee for future performance. But there’s no doubt that stability is a welcome trait in these markets.