Following the close of its fourth flagship infrastructure fund, and with strategies targeting Asia and renewables, Luke Taylor (pictured) at Stonepeak explains what is driving interest…
Following the close of its fouth flagship infrastructure fund, and with strategies targeting Asia and renewables, Luke Taylor (pictured) at Stonepeak explains what is driving interest…
In February, Stonepeak announced final close on its fourth infrastructure fund with USD 14 billion of commitments, almost doubling the size of its previous Fund III raised in 2018. The manager also has mutli-billion-dollar infrastructure funds targeting Asia and renewable energy and now holds more than USD 46bn in assets under management. Here, one of the leading figures in the firm’s US team explains how the investment landscape is evolving.
What is driving LP investors into infrastructure funds in 2022?
There are more and more investors coming into the space, driven by the fact that people see the resiliency of the asset class through different cycles. Infrastructure broadly has always had very good inflation linkage and now it’s been tested through various cycles of dislocation, such as what’s gone on with the pandemic. You’ve also got a tonne of required capital investment over a long period of time that creates a big opportunity set to reinvest. And in terms of driving value across the operations of these assets, not only from an ESG perspective, but there tends to be a lot of value drivers in these assets as well.
Large-cap GPs are raising larger, core infrastructure funds. What makes the lower target returns there more attractive?
If you look at core infrastructure, you’re seeing a pretty active allocation from investors away from long duration fixed income to core infrastructure, because they can see the benefits of the inflation linkage in these assets. So not only is there a huge opportunity set among sectors like utilities given there’s a lot going on from an energy transition perspective, but the larger opportunity set is there too. We’re seeing a huge demand from investors to get access to those assets.
But I don’t think the high inflationary environment has necessarily changed where we’re focusing as a firm, we’ve always been pretty thematic in terms of picking out the sectors which we think have the best growth dynamics. And we’ve always invested on the basis that eventually, the long run of declining interest rates was going to come to an end, so you need to make sure you’re thinking about that when you’re underwriting assets ultimately.
[In terms of volatility] the stock market may be a little more choppy, but infrastructure assets are very long duration assets so you can usually pick the time that you want to exit. Also, you’re seeing continuation vehicles which offer the option to continue to hold these assets for the longer duration and you’ve seen the proliferation of core vehicles which are open-ended.
Supply chains and data usage have put a spotlight on infrastructure post-pandemic. How has your investment philosophy changed?
In terms of sector focus, everybody’s got these big themes around digital and energy transition: the winners there will be the firms that have the deep relationships around each of those sectors. We’ve also got some real supply chain challenges and so we are seeing a big opportunity to invest in those assets, particularly in increasing capacity across subsectors like terminals or cold storage.
I do think we’ve seen emerging classes like healthcare, which is an area we’ve invested in recently. I think broadly, you see a lot of healthcare in portfolios, places like Australia a little more and Europe, probably less than the US as the US infrastructure market is inherently a younger market compared to some of the longer established markets like the UK and Europe and Australia.
From a geographic perspective, we started off investing in North America 10 years ago and we’ve slowly become global. We’ve got an ambitious investment thesis across Asia, we’ve seen great macro tailwinds in that region, a lot of opportunity to invest in their infrastructure as they as they continue to build out those economies. We’ve also opened a London office with the goal of investing more across Europe [so] as a general matter we try to invest in places that have strong legal frameworks.
As an early investor into communications assets, how difficult is it to invest into digital infrastructure at the moment with increased competition?
The world is going through a sort of digital densification and we think that data usage is a great long term trend to invest in, so we’ve been investing in all the infrastructure that supports the proliferation of the use of data by individuals. [But] it’s having those deep industry relationships, and a deep operating bench of partners which drives a lot of deal flow. So for example when you see opportunities where the hyperscale [data center operators] are spending a lot on capex, having a deep relationship from doing it for a long period of time creates a tremendous opportunity to partner with them to build out their asset base. I think that when you’re buying one of these platforms, you’ve got to have a pretty good lens and understanding of what are the growth prospects and can you truly deliver on that.
Last year you reached closes on an Asia fund and a renewables fund, before closing your fourth flagship infrastructure fund in February. Do you expect to see further sector specialisation among GPs?
You’ll continue to see strategies emerge around the energy transition, and active strategies where, for example we’re choosing to invest heavily in renewables or where you can responsibly invest in a sector like natural gas where you can actually do a lot of things to reduce methane leakage. We’ve always had the view that natural gas was going to be a pivotal piece of that transition. And so you want to continue to invest in those assets to make sure the transition can occur as quickly and reliably as possible, rather than I think people avoiding those assets, and then suddenly energy prices start to spike.
Read the rest of the Private Equity Wire Insight Report Pricing Power: How infrastructure funds are taking on inflation
