In New York City in May, IREI hosted its i3 Roundtable Series: Spring 2019 with a cross-section of the institutional infrastructure investment market participants, including U.S. and global pensions, infrastructure investment managers and consultants. The organizations present were First State Investments, Allianz Global Investors, Blackrock, National Real Estate Advisors, QIC Infrastructure, Upper Bay Infrastructure and New Jersey Treasury Office.
The purpose of the meeting was to give participants and i3 readers a glimpse into the current state of the market. The roundtable focused on trade and tariffs, the definition of infrastructure investments, late-cycle investing, climate change and the effect on investments, and transformation in the energy sector over the next decade.
Highlights of the discussions included:
The expanding definition of infrastructure and the necessity trap
Infrastructure investments are defined by a set of economic characteristics; for example, they include assets that provide essential services for societies and customers — water, power and, increasingly, data, to name a few. But is it true that because an asset provides a particular essential service, it is therefore infrastructure? And in our day and age of rapid innovation and technological change, how long will those considered essential services remain so, and what new services could become essential in the near future?
Roundtable participants discussed this “necessity trap.” That is, if investors too quickly check a box and label an investment as infrastructure because it provides an essential service, they can set themselves up for negative surprises down the road.
Data centers are one asset type increasingly being targeted by infrastructure investors. But whether they fit the classic definition of an infrastructure investment can’t be known until years after the investment is made, roundtable participants pointed out.
To help investors understand what constitutes an infrastructure investment, roundtable participants suggested they first define what infrastructure is meant to do in their investment portfolios and that will help them define what is and is not infrastructure to their organizations.
The energy transformation over the next decade
Renewable energy represented two-thirds of newly installed energy production in 2018, and wind and solar are increasingly popular investment choices for pension funds and other institutional investors, but wind, solar and geothermal still only make up 1 percent to 2 percent of global energy production.
Despite the increasing pace of renewable energy adoption, roundtable participants don’t believe oil and gas production is going to be supplanted anytime soon and, in fact, in the United States, the need for infrastructure to process and export oil and gas is in demand. However, participants also acknowledged there may come a day when these sources of energy, similar to coal, are on the road to becoming obsolete.
In the meantime, the push for the adoption of renewable energy among colleges and universities stands out for some of the roundtable participants because the same enthusiasm for investment in renewables among the educational staff is not evident in endowments’ portfolio investments.
Taft Hartley pension plans, meanwhile, have been big investors in renewable energy, both for the investment opportunities as well the jobs they create for union trade members.
More of the roundtable discussion will be reported in the June and July-August issues of Institutional Investing in Infrastructure.
Drew Campbell is senior editor of Institutional Investing in Infrastructure.