As we kick off the interview, Albena Vassileva starts by saying that infrastructure has been a very high growth asset class and it’s accelerated over the past five years.
“By now it’s also a very big asset class in terms of money raised. It’s still smaller than classic private equity strategies, but it’s growing very fast,” she says and adds that one reason is that the average size of the opportunity they address is high.
“One of the interesting talking points for me when it comes to infrastructure, especially in relation to other strategies within private markets, is what investors should use it for – and what they should not use it for. Over the last couple of years, I’ve seen a tendency that everything should to be addressed through an infrastructure strategy and that temptation has been strongest in the energy transition sector, but also in the digital sector,” she says. She adds that it’s important to be true to yourself and keep certain characteristics of the infrastructure asset class and leaving other deals with a different risk return profile to different strategies.
Asked how she would like to frame how infrastructure should be viewed and what role it should play in a portfolio, Albena Vassileva says that some of the key characteristics would be a moderate risk return profile and some level of maturity.
“It could be greenfield, but then it would need to be in a market that is well understood and technologies that are a bit more mature. If you do greenfield in a less mature market and with new technologies that are not tested it doesn’t fit into the infrastructure bucket,” she says. She adds that some of the classic characteristics of infrastructure are essential services, inflation protection and high barriers to entry, which is what have made the asset class so popular in the last five to six years.
Commenting that some investors “found” the asset class during the period of zero interest rates as they needed a fixed income replacement, Albena Vassileva says that’s true to some extent.
“On the fundraising side, that has been a strong driver, but for example real estate can provide the same thing. I think what we in infrastructure have had as a differentiator is the stability of returns. It’s not just the fact that we can provide an inflation hedge, which some other asset classes, can also offer. It’s more about that extra stability in the assets. For me, being on the deal side, one of the key things around infrastructure has been linked to essential, hard-to-replicate assets and that is very important. We currently have two very prominent sectors where a lot of new physical asset creation has happened. One is energy systems and the other one is assets to enable the digital economy. When new physical assets are being created, it’s very natural to say “It’s an infrastructure investment because you’re building something”. You’re building a grid, you’re building a production facility, you’re building a generation facility, you’re building a data centre and so on. However just because you’re launching a business which has a big physical asset does not mean that it meets all the classic characteristics of infrastructure investing,” she says.
Asked about some of the typical questions she gets when meeting with investors, Albena Vassileva says that a lot of the attention is on the risk framework.
“We’re in the fortunate position of having consistently delivered on our target profile. If you look at IFM, most of our assets under management are in core and core plus. We have also recently launched a value-add strategy. When we talk about core and core plus infrastructure, we have not gone with exorbitant promises to investors, and we are not encouraged to take on more risks simply to double the return. We have conservative investors, such as pension funds and insurance companies and for them it’s more important to be within the bands that we have given rather than to go and take a very big bet with the promise of delivering a slightly higher return. They can do that with a different asset class. They’re very big and they’re very sophisticated and they know where to go for the excess returns,” she says. She adds that it’s of course positive if they perform at the higher end of the band that they’ve given.
“That tends to be rewarded with repeat investment, but we don’t take decisions which for an extra per cent or two could jeopardize the core of the asset class. That’s why I think most of the questions very often have been around the risk framework, asset allocation, underwriting principles, discipline and so on,” she says.
Asked about how investors typically view the investments they make with IFM and what function the assets should play in their overall portfolio, Albena Vassileva says that very often it’s the stabilizer in the portfolio, which also offers very good diversification benefits and as a result extends the efficient frontier of the portfolio.
“We’re not the highest returning asset class, but that also means we need to come with a very low standard deviation. So very often we might be the core of a portfolio – especially for investors who may typically be a European, American, Australian pension fund or insurance company and sometimes big family offices,” she says.
In terms of structures, IFM runs some USD 96 billion in infrastructure equity investments and almost all of that is in open-ended structures, which by now have some three decades of history.
“I think that track-record and the history is very important because one of the key questions that an investor will asks is around liquidity in an open-ended structure. How do you manage liquidity? We’re able to have a credible discussion around an open-ended strategy because we can provide statistics over decades and we also have a huge asset portfolio to back that,” she says.
When asked if there are still some misunderstandings when it comes to infrastructure, Albena Vassileva points to the energy transition and also to some extent to the digital transformation.
“If you look at many of the other sectors within infrastructure – such as transportation, utilities, roads and ports – they are very well understood. You can of course have bumps here and there, such as the impact of Covid on airports, but these are temporary effects. Also, one of the good things if you have a big open-ended vehicle is that you don’t need to sell at a low point and that’s actually very important. Now, when it comes to the energy transition and the digital transition I think there are some very credible questions around both sectors right now. In the case of digital, people got rightfully concerned that there’s excess asset creation for example in fibre and that’s a very valid concern. In data centres there are also relevant concerns, such as sustainability because it consumes a lot of power and a lot of water. Are we doing it in a responsible way? There are also questions related to the huge concentration on the demand side. If you look at many data centre themes, at the end of the day, you are exposed to a handful of Silicon Valley technology giants on the revenue side,” she says.
She adds that the technology related opportunity remains positive and sizeable but needs to be addressed in a selective and disciplined manner, in companies with good diversification, operational capability and high sustainability standards which IFM has aimed to do. “In energy transition, there are also positive examples of essential infrastructure which fit the investment profile very well. These could be in more traditional infrastructure, such as electricity grids, in which IFM has long-standing experience, and which provide good growth opportunities across Europe at the moment. Or in renewables generation and storage, where it remains essential to manage the risk profile through prudent revenue contracting structures, expertise in the construction and operational phase and focus on reliable technologies,” she says.
