CIO: What’s driving the intense interest in infrastructure? Is it
all low interest rates?
Kathryn Leaf Wilmes: With record low interest rates, many
investors are looking for defensive strategies that also have the
potential to produce yield. Infrastructure fits that bill perfectly.
There is also a longer-term trend at play where investors are
looking to establish, and increase, allocations to infrastructure
as a stand-alone asset class for diversification purposes and as
an inflation hedge. The combination of these two trends is leading
to the robust fundraising environment. To put numbers around it,
Preqin found private infrastructure fund managers raised $131
billion from 2013 to 2015, and a one-year record of $52 billion in
CIO: Your approach to the infrastructure market differs from
that of many of your peers. What’s the key difference, and how
does it benefit investors?
Wilmes: What differentiates us is how we access the asset class
on behalf of our investors. Our strategy focuses on secondaries
and co-investments. These are less competitive markets where
deal flow continues to be robust and relationships are key to
unlocking opportunity. The potential benefit to our clients is that
we have a lot of deal flow to choose from, which can be a critical
differentiator in today’s market. We currently invest in less than
10% of the co-investments we see. There can also be significant
portfolio benefits in terms of vintage year and asset and manager
diversification, which may add additional resilience to our client
programs. Lastly, we work very collaboratively with our clients.
We do not apply a “one-size-fits-all” approach, so we can tailor
programs to a client’s specific needs.
CIO: What’s the appeal of the secondary market?
Wilmes: We view secondaries as a differentiated access point
to the same high-quality infrastructure assets other investors
may be investing in directly. The key distinction is that we typically invest several years later. A big advantage of this is that,
in many cases, the companies have been de-risked at our entry
point; leverage has been paid down and there is clear visibility
on operating and financial performance. And because of market
inefficiencies, we’re often able to buy in at a lower price point
than the original investors.
CIO: With all the money flowing into infrastructure, what do
valuations look like?
Wilmes: In the direct market, it’s 2007 all over again. We are
seeing record pricing, particularly for core trophy assets which
have significant scarcity value. It has become very challenging
for core fund managers to compete with aggressive direct buyers, and this may only get worse as the new owners look to hold
these core assets long-term. As a result, core managers are
Investors in search of yield increasingly are turning to infrastructure, where private markets
investment firm Pantheon has nearly three decades of experience. Chief Investment Officer spoke
with Pantheon Partner Kathryn Leaf Wilmes, head of global infrastructure and real assets, to find
out where the opportunities are and how Pantheon is taking advantage of them.
increasingly being pushed up the risk-return spectrum. We see
some managers looking to do more greenfield deals, focusing
on assets that have more operational complexity, and pursuing
opportunities in “stretch infrastructure”—assets that have infra-structure-like characteristics but aren’t what people traditionally think of as infrastructure. There are still attractive areas to
invest, but we believe investors need to be strategic about how
they get exposure.
CIO: Given these valuation levels, how are you positioning yourself for success?
Wilmes: We are trying to build resilience in our client programs.
First, we are being highly selective, focusing on reasonably valued assets we believe can withstand market cycles. We’re also
diversifying by asset type, vintage year and sector. Secondaries
are powerful in this respect because they can allow you to invest
across multiple vintage years and access deals that may have been
completed in a very different valuation environment. Lastly, we are
focused on investments with conservative capital structures.
CIO: Where are you finding the most interesting opportunities?
Wilmes: In our view, energy infrastructure, particularly in North
America, offers deep value today. The collapse in commodity
pricing has impacted valuations of assets that transport, process, and store natural gas and oil. A number of these companies
have needed to raise capital to de-lever and fund future projects,
and there was a window in the first quarter of this year when
many of them were unable to access public debt and equity markets. Through our market relationships, we were able to take
advantage by investing in the preferred equity of a couple of midstream companies, gaining what we believed to be strong downside protection through the security along with significant equity
upside. We anticipate a second wave of opportunity as challenged
exploration and production companies look to divest midstream
assets. We’ve also been investing in de-risked greenfield projects where all key permits and contracts have been secured but
where we can earn a return premium for investing at an earlier
stage in the life-cycle of the asset.
CIO: Are valuations challenging in the secondary market, too?
Wilmes: We continue to see good value in the infrastructure
secondary market, thanks in part to favorable supply-demand
dynamics. This market has grown from just over $1 billion of deal
flow back in 2010, when Pantheon did its first infrastructure secondary, to $9.7 billion in 2015. Meanwhile, this is still a niche market where the universe of buyers remains very limited. The supply-demand imbalance typically translates to favorable pricing. ■