The key to infrastructure equity is hands-on, active management

Armin Sandhoevel | 06/11/2018
The key to infrastructure equity is hands-on active management

Summary

As more energy-infrastructure projects seek financing, institutional investors are playing an increasingly significant role not only as lenders, but as energy suppliers. Partnering with the right active manager – one who has expertise in managing infrastructure projects – is critical to pursuing attractive returns and managing risk.

Key takeaways

  • New global political agreements mean more infrastructure projects are coming online, and institutional investors are increasingly supplying capital in place of governments and banks
  • In the energy infrastructure space, privately negotiated electricity consumption agreements are on the rise, forcing investors to learn how to act as energy suppliers
  • Partnering with the right active manager – one who has the infrastructure expertise to manage the project itself – is critical to pursuing attractive returns and managing risk

Infrastructure equity has become a major investment theme for the institutional investment community – particularly “green” infrastructure. In fact, according to Preqin, half of all institutional investors plan to increase their infrastructure allocations, preferably through energy infrastructure investments.

New global political agreements mean more infrastructure projects are coming online – including in the fields of renewable energy, water infrastructure for supply and sanitation, green buildings and sustainable transport. In Europe in particular, there is enormous demand:

  • The European Commission has been canvassing for a so-called Energy Union, which would be financed by EUR 315 billion in guarantees granted by the European Investment Bank and from capital released from the European Structural Funds.
  • In 2020 alone, roughly EUR 1.1 trillion will be needed within the European Union for investments in energy grids, generation and storage.

At the same time, these projects cannot be paid for out of government budgets alone. Moreover, faced with higher capital requirements, banks are exercising greater restraint when financing investments. This has encouraged institutional investors to play a significant role as lenders in an asset class that can feel unfamiliar.

Why use active management in infrastructure equity?

As more investors move into this multi-trillion-dollar space, the energy industry is changing dramatically. While energy infrastructure investments were once the preserve of large energy suppliers, new opportunities are being opened up by increased decentralization and disintermediation. One only needs to note the latest “buzz phrases” in today’s industry – the rise of storage facilities, direct marketing of electricity, the decentralisation of the electricity market, etc – to realize that many new changes are taking place.

As a result, privately negotiated electricity consumption agreements are on the rise, and financial investors must not only find ways to put their money to work, but also learn how to act as energy suppliers. It is here where partnering with the right active manager – one who has the expertise to manage the project itself – is critical to pursuing attractive returns and managing risk.

Two examples of the benefits of active management

First, in the past, infrastructure investors frequently acted within fixed feed-in tariffs structures to limit the return for electricity generated from renewable energy sources, both upward and downward. Today, however, prices can be optimised through individual, well-negotiated contracts between generators and large industrial consumers – which an active asset manager can help facilitate. Of course, if poorly negotiated, these contracts can be detrimental.

Second, due to the interrelation of different individual energy generation types – including renewable, fossil or nuclear resources and how they interfere in the electricity grid – the electricity market has become highly complex. Analysing the nature of the market and understanding where revenue flows come from is crucial for success. For specific markets, market electricity prices can be highly volatile, but exposure can be limited via individually negotiated power purchasing agreements that offer cash flow stability and visibility – and it is here where experienced active managers can again add value. “To invest and to forget” using a passive investment strategy can be a disadvantage in today’s complex energy infrastructure markets.

What to look for in an active infrastructure manager

To help add value in the energy infrastructure space, the right active asset manager can bring broad knowledge and extensive experience to the table, including:

  • The ability to understand the supply and demand patterns of energy markets, source the right assets, and extract commercial and technical efficiencies.
  • In-house technical and commercial expertise to help improve projects.
  • Deep knowledge in the commercial and technical aspects of energy-generation plants, storage technologies, energy grids and energy-efficient technologies.
  • A time-tested track record of establishing partnerships with energy companies and developers.
  • Extensive portfolio management and asset management capabilities to help create an attractive risk-return profile.
  • Experience in the structuring and regulation of alternative investment funds – and demonstrated insurance know-how to complete the picture.

In our view, these are essential capabilities for helping to execute both long-term buy-and-hold and mid-term buy-and-sell strategies in this space. If infrastructure-equity managers make the right investment decisions and actively manage their clients’ assets, they can hope to achieve an attractive risk-return profile, smooth out volatility and seek stable cash flows while retaining value over the lifetime of their clients’ portfolios.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations.

This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions in Switzerland; Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan]; and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

655187

Expert-Image

Armin Sandhoevel

CIO Infrastructure Equity
Armin Sandhoevel is Chief Investment Officer (CIO) Infrastructure Equity with Allianz Global Investors, which he joined in 2012. Under his lead, the first renewable energy fund of AllianzGI was successfully put in place during the summer of 2013. Armin has been focusing on energy themes since 1994. He was previously Head of Carbon Risk, and led the risk management of renewable energy, at Dresdner Bank AG. In 2001 Armin joined the Allianz Group. From 2007 until 2013, he was CEO of Allianz Climate Solutions GmbH, where he now serves as a member of the Board of Administration. He has accumulated more than 20 years of specific expertise in investment management, emissions trading and renewable energy financing. Moreover, he is a member of the board of directors of the German Energy Agency (dena), among others. Furthermore, he advises several carbon-related funds as well as national and international institutions.

Infographic: 6 takeaways from our London Investment Forum

06/11/2018

Summary

We condensed a day’s worth of discussion and debate into six quick tips for investors.

Active is: Allianz Global Investors
Contact
For more information on our products and services
Contact Us