With Laurent's segle and from London and Gerard read from Berlin. This is redefining.
Energy Today on Really Think Energy Child, we're going to talk about infrastructure funds and their role in financing honorables and data center.
Absolutely, it's a very very important topic because I think we both agree, Lauran, there's quite a lot of changes going on in the renewable space, some good, some bad, some exciting, some not, and we need to really dig into this topic.
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Back to the show, Yes Jr. The infrastructure fun industry, we have a technical term called AUM asset under management and that sector as quadruple over the past decade. So we need to ask ourselves, who are the players, how does it work, what are the trends? And for that we've brought an expert in the matter.
Yeah. Again, it is someone that really keeps on top of the numbers, because it's all about numbers, as you said, assets under management, and actually the trend towards bigger is better, as I might say.
We'll see about that. So I guess today is Zach Bentley is American editors for Infrastructure Investor, which is part of the PEI Group. The PI Group is a subscriber focused business intelligence company producing a lot of that, as you said, around infrastructure or private equity, real estate, and inform strategy and decision making of course alternative asset classes.
So let's bring him on the show. Zach.
Welcome to the show. Thank you, lan Well. Zach.
Let's really got straight into this, I think, and I think it would be very healthful just to help people understand a little bit about what investing in the infrastructure is, what do we mean that, and why it's different than private equity all that type of stuff.
The concept of infrastructure investing is you're investing in long term essential assets and it's the long term bit where it probably differs to private equity, where an ownership holders maybe three five years or so, whereas infrastructure is usually eight, ten, twelve or even a perpetual hold by a fund. That's a big difference. It's also meant to be a lower risk,
lower returning form of investment. So depending on where you are in the what we call core core plus value add spectrum, you're looking at somewhere between eight of fourteen percent returns when I say investing in the essential assets. Previously, in the past that's looked quite traditional, whether that's roads, airport, water the like. Sometimes we see a few more quirky assets turn up acquired by funds. In twenty twenty five, we had chicken farming, we had firefighting, helicopters, we had
the old favorite of laundry turn up. Again, it's not always what you might think infrastructures.
But the key thing was what the investor is looking for is long term returns, right yeah, And so anyone who's building infrastructure where maybe the payback periods are long on us, that's the type of thing that these investors are putting money into.
Right yes, And the yield based component of these assets is much more important in infrastructure than it is in private equity.
For example, the type of assets they are investing in, would you say they are operational, they are about to be operational? How much risk has those infrastructure willing to take. I think if you're more at that eight percent circle range of return, you're looking at something that's more operational, whether that's operational energy assets or operational pipelines and things
like that. If you're going for the higher returns, you're doing a lot more green field development, So a lot of capital expenditure going into renewables and data centers and fiberpore band for example. In the type of investment which are being made now. So we're at the middle of the decade, and let's compare with like five or ten years ago, what are the main categories clean energy infrastructure like ports, airports, tunnels, you know, or whatever, and of
course data centers arriving. So how do you see the landscape of the type of investment being made.
The last few years has just seen a real ramp up of firstly renewables development. It's been a part of the market for quite a long time. People now own very large development platforms and there's a constant build out of those, we have the data center market, which in
the last few years has exploded. And it's important to note, and maybe we've been ten minutes onto a podcast and haven't used the word AI yet, but it's important to know that the data centers were booming before AI, but the AI tail winds have just sent this into into a way that we've kind of never seen this market before. You know, we used to have a sector with an infrastructure and we called it telecoms, and that just used to be towers, but sort of the digital infstructure space
has broadened so much more with data centers and fiberpore band. Obviously, during COVID, we saw a big fall in the interesting airport assets, for example, or toll roads where people were getting revenue based on the toll being paid. Airports are much more in fashion now than five years ago. There's been quite a lot of expenditure into those by infrastructure
funds in the last couple of years. I think sort of people have understood the risk that is now involved in that, and we used to see a lot more activity in what was called social infrastructure. That's a much smaller part of the market these days.
Zach can I maybe ask you to sort of put in context really the size of infrastructure investments across the world and just give us an idea of whether this is growing, what sectors are Obviously you talked about AI, we can see that, but just to put it all into relativity so that we can really get a sense of what's going on in the market.
Infrastructure investor. We recently published our fundraising statistics for twenty twenty five, and that told us that this was the biggest fundraising year ever on record, with nearly three hundred billion dollars raised in the year. People used to look back at twenty twenty one and twenty twenty two as the heated days of fundraising, and that was just shy of two hundred billion in those two years. So this
three hundred billion is a massive vamp up. If we go back ten years, it was fifty billion in the years, So the multiples are expanding, the size of the funds are getting much bigger. What I would caveat that with is this three hundred billion is based on when the funds closed, and that's when we consider it raised. So we have actually had a couple of years of more
fallow fund raising in the last two years. And what we've seen in twenty twenty five is there's a lot of funds that were maybe launched in twenty twenty three or so have got to final close slower than they might have done previously.
What you're saying is the funds getting bigger, but it takes more time to raise them.
Yes, the average time for fund to close these days is about two years, whereas previously they used to be a year and a half or so.
And of course one of the conclusions you also draw is that the big fund manager are just getting bigger. There is a generic consolidation and I guess around the pipeline, the team, the access to data, I don't know, but I mean it looks like it's always the same name and the numbers get just bigger and bigger. Yeah.
Within our statistics, the top ten funds that close into twenty twenty five accounted for nearly half of all the capital rays. I think that gives you a window into that and it's becoming increasingly condensed around those top players. Where many of those players and I'm thinking names that a lot of people might know, like Brickfield Global Infratructure Partners, KKR, Macquarie. They won't have just one string to their bow like
they used to. They'll likely have two, three, four funds in market any given moment addressing different parts of the market, you.
Mention some of the names, and of course another JPI is part of black Rock, and black Rock was already big. I mean here, you're really talking about an absolute behemos. If you take your top ten, how many are US based and of course is operation all around the world, and how much are European based?
A majority would consider themselves US based, even though the funds that they've raised are usually global infrastuch funds. Maybe Macquarie is slightly different in that they've always raised in America's dedicated funds, at European dedicated fund, an Asian fund, But generally most of these players will be US based
with global outlooks. In terms of the largest players, you do have some European head courted ones like EQT and Copenhagen Infrastructure Partners, but it's predominantly headquartered in the US.
Can we move a little bit into sort of the area that AZEF and Lauran do a lot of work, which is this whole area of energy and can you talk a little bit just from a high level what you're seeing there in terms of trends.
I'm focused on the Americas and we've had a busy year in renewables where a lot of the tax credits have been rolled back by the Trump administration, and there's been a lot of project cancelations. Even most recently was the just at the end of twenty twenty five, the Trump administration canceled permits for five offshore wind projects on the East Coast, one of which was actually delivering power to the grid already, another one was expecting to do
so in a few months time. These were finance projects which were essentially almost ready to go and they were canceled. So that's been when it comes to renewables in the US, people over the last year have been taking stock where can they play in this region that's not going to get affected by the administration. And then in Europe you've had several years of large scale development. You've seen a lot of trouble in Europe with offshore wind too. Several
auctions in the Netherlands and Germany. In the UK have not produced the results they've wanted to. It hasn't been considered particularly invested friendly, but you're also seeing an incredible amount of price volatility in Europe, especially if you look
at a market like Spain. The blackout in Spain exposed what was a massive underdevelopment of battery storage, which many other countries have been very good at, exposed some real requirements that are needed if Europe is going to control the load of energy that's coming onto the grid.
One of the trends, and you're going to tell me if you see the same thing, is decretion of platforms. So in fact, the infrastration funds don't invest in assets anymore, the great dedicated platforms, whether it's around batteries or it's around now what they call ipp So they don't just own wind farm or solar parks. They put them together with a management team who's going to make much more granular management of the energy situation. Do you see that platform concept being more popular.
Yes, It's been a long time since people were just investing in a singular asset through an infrastructure fund. The platform has become the way to go, just in terms of scale and reppicability of what's worked. You could put that into multiple projects rather than just owning a single project. And it's not just the platforms. It will be very common for an infrastructure fund manager to have what they'll
call either renewable funds or an energy transition fund. These funds were thirty two percent of the fundraising capital five years ago and that's now forty four percent in twenty twenty five. So it's really taking up out of the market there.
And of course the big development of past three years is so all around that center theme, but here it's we are going kind of far away from what used to be a core product with a lot of guaranteed revenue from government and so on, and here it's really the all AI and the hope or the faith that the I will deliver. So how important all those data centers, because we've seen a few of the names you have mentioned before we involved into those development.
We need to separate the data center of development both for there's the cloud computing requirements and there's the AI requirements. We all don't know where the AI is going to land out, whether that's in two, three, four years time. We do that we're going to always need these cloud computing requirements, and so that remains a driver for data center development through infrastructure funds. If you're placing all of your faith in AI coming off, that's maybe a bit
of a gamble. That's you know, as you say, not the kind of thing that would be backed by a long term contract previously. We are seeing a lot of evolving contract developments happening the blue out case with Meta last year, where if Meta cancels the contract four years in that blue Our's debt still gets repaid. We're seeing some evolving structures where investors are maybe getting protected in case the AI story doesn't work out, or that the
chips that are within data centers are improving. But the data center story without AI is still a massive story that's just going to be continuing, and it's completely intertwined with energy now, whether that's renewables or the broader conventional space. The first for power is driving this market in a way that we haven't seen it before.
So Zach, I'm really interested in where is the new capital going.
Is it all going into AI and energy, or where is it moving to.
We're still at the space where most of the infrastructure funds being raised are global funds and global generalist funds. This is trying to target all forms of infrastructure and within a generalist fund, you're going to see quite a bit of renewables, energy data centers, but few managers will want to be over exposing themselves to single sectors. Within those generalist funds, what you do see is much larger
data center dedicated funds. If they take, for example, twenty twenty four, our fundraising figures showed data center dedicated funds were just four percent of the capital, and then in twenty twenty five they're twenty eight percent of the capital. So those kind of dedicated funds are really ramping up, right, Okay, And of.
Course I guess a lot of those fund manager way back when it sounds like it's ancient times, they were all net zero and everything, and now they don't have any problem reinvesting into fossil fuel infrastructure. So all those ESGY claims they been dropped are How do.
You see that this has been a really interesting dynamic over I'd say the last eighteen months or so.
Yeah, you're right.
There was a time where we were ESG everything, and you had lots of both the investors themselves, so the pension funds and the insurance companies and the like, and were several fund managers not or were shying away from things like gas related and structure, whether gas fire power stations or gas pipelines. And you've seen a much more wider acceptance of that kind of investment from a lot of funds now. And the more interesting dynamic is that
it's being wrapped up in an energy transition blanket. At the same time, you have a player like Blackstone, which has an energy transition fund and they've now got several gas fired power plants within that energy transition fund. We saw also last year a US player, Exelsia Clean Energy, they struck up a partnership to integrate some gas into their renewable portfolio. We've seen another fund run by Denam Capitol under the label Sustainable Infrastructure Fund, and that agreed
a deal to convert coal plants to gas. I think the acceptance of gas as a sustainable form of investment has come leaped and bounds over the last year or two.
Yeah, I can't wait to see the vlady Mere Sustainable Fund.
What do you mean? I just set that up last week.
The Russian Ukraine War did change a lot of things within this respect. If we're talking about this dynamic, there have been two main things that have really shaped The Russian invasion of Ukraine just reminded investors and managers that gas is needed in this system, at least for the foreseeable future. Perhaps we worse to hasty in writing it off. And then there's also just the massive energy demands that's
coming from AI and data centers. That's also reminding us that this can't all run unrenewables.
Because you talk about geopolitics and security, do you see also the infrastructure or people near some more defense assets or still marginal.
That's a conversation that's happening in Europe quite a bit. What we see from our perspective is lots of people like the idea of investing in defense as a potential infrastructure asset. There's a real lack of defense infrastructure assets that would fit into someone's portfolio. There's really few investable opportunities that you would want from an infrastructure fund in defense.
It's the beginning of the year, so we did our prediction a few weeks ago, but I like to continue make predictions. I can tell you that autonomous driving with robot taxi fleet, that's going to be a new chapter in infrastrctory investing. That's what I think. You hear the same thing around Eve's fleet and stuff like that, or am I just bubbling?
Call me a traditionalist, but I don't see that entering into people's portfolios in the short term. We did see a few years ago a lot of ev charging infrastructure investments and performance on those was quite mixed. And then a lot of the uncertainty on this is driven by part of the pan the automobile industry, who quite wavering on some of their commitments to electric vehicles. If you've got that side of the Shane wavering, you're not going to find the instruction investors going into that.
Okay job, Yeah, I suppose when I'd love to just talk a little bit about this sort of consolidation in the market and what seems to be happening. What seems to be happen is the big guys are getting bigger and they're also making acquisitions and stuff like that. Could you talk about why that is and how you see the future in terms of the specialist asset managers in the infrastructure area.
It's quite announce picture. As I said before, we're seeing a much larger presence across the infrastructure fundraising market by say our largest ten to fifteen managers or so if I take this to renewables, we had some massive fund closers last year. Brookfield's Global Transition Fund raised twenty billion. You had Coping Infrastructure Partners that raised twelve billion euros. Clearly there's a lot of money being focused at the
top there. What I would say is a lot of investors do also prefer more of a pivot to mid market investing. And you see this kind of thing manifested in the Tillery Energy from Finland. They just raised a five hundred and fifty six million European renewables fund, and we see plenty of kind of that more mid market approach to renewables at the same time. So while the big guns will grab the headlines, I think there's still plenty of activity beyond that.
I agree because when you're a big gun and you have a fund of that size, you know, you don't even open anything if it's below say five hundred million, right because on the top of that, and I guess a lot are teaming up with like the global soffeering funds. So you see a lot of things happening with the gup from say Singapore or the girlf Those guys, they're not interested in fifty or one hundred million tickets, and there's a lot of things happening in those zones.
Yes, And the question that people often have with bigger funds is what's their route to exit and is an asset too big? Generally, the larger funds do have a good track record of exit and exit multiples, but there is an increasing focus from investors more towards mid marketshly because of a worry as to who is going to be the eventual buyer from the larger funds in terms
of consolidation. We are going to see quite a bit of that over the next couple of years, particularly in the US, but also in Europe as the regulatory effects take hold. We maybe don't need one hundred and fifty two hundred renewable, needy developers out there.
Finally, on that topic there, why don't the pension funds just do it themselves?
You do have pension funds who invest directly. That was populated twenty years ago by lee Canadian and Australian pension funds, but a lot of pension funds don't have the resources
to be doing direct investments. It takes up an incredible amount of work in due diligence and finding opportunities, and they're much better set up to commit funds to infrastrutual fund managers and of let them do the work, and you do get a much bigger interest in co investment these days, but that's not the same as the pension funds doing themselves.
Zach crystal Ball take it out twenty thirty. What's the world of infrastructure investing look like.
I don't want to sound like a guy who was maybe in the early nineties saying that this email thing is never going to take off, but I am skeptical that the wave of investment that we have at the moment in AI and AI related infrastructure maybe might not be as fruitful as we think it might be in a few years time. So I think that's definitely one thing to be looking at. I'm very interested to see how, especially in the US, how renewables perform. There's a lot
of challenges to come. We're going to see as a result of some of the changes that have happened in the last year, we're going to see a rush of financing over the next year that might lead to us slow down in maybe two three years time after that, as the market gets used to a different way of doing things. Going back to what I said before about gas,
that's gonna become a much more investable opportunity. If we have this big investment wave in data centers, they need to be powered by something that the big tech giants can rely on. Whether that's fair or not. On renewables, we're going to see a much wider embrace of gas and gas related structure.
And will the current funds be even bigger.
That's an interesting one. The funds are wary about asking investors for ever increasing capital raises, so we had a story recently that Brookfield will be looking to raise about twenty five billion for it's six fifth such a fund this year, which was the same target for its fifth such a fund, And that's a bit of a step change that hasn't really happened before. But I think the managers are wary that these funds are getting bigger and investors are being asked to pay up all the time.
Well, Zach, thanks very much for this.
It's been great players are actually having you on the show, and certainly I've learned a huge amount.
Thank you.
Thank you for having me job. That was a very very rich conversation, sure was, Laurent.
So where do you want to start?
First of all the topics we didn't talk about, and I'm pretty sure they are a bit touchy, so you know, I'm sure they have a nice dialogue. The first is the role of interest rates. The fact that they were extremely low last decade and then they went up, now they're going down again. That is a huge impact on that industry.
Yeah.
Actually, I think Loren, particularly for renewables, because let's talk.
About what the play the game was for the last fifteen years, which is you developed the assets and then you sell it to lower cost capital provider and they aggregate them up and they sell them and turn to another lower cost capital provider, and even sometimes they took it again, made it bigger and sell it to the eventual owner of the assets. But that game is now up, and I think it's important to explain why that game is up.
Yeah, And of course of the game with the refinancing at always cheaper interest rates. Now because it's an asset class, the reterm it needs to deliver is any way linked to the interest rates. In general, if the interest rates are at one two percent. You're an infrastructure fund, you deliver six to seven, people think you're a god. But when the interest rates they go to four or five, now you need to deliver eight or ten percent. Now. The problem is because this is long term, you've locked
in a lot of five percent in your portfolio. So the all rebalancing is happening now.
And it's complicated, right, makes everything complicated. It also means for renew of us going forward that your cost of capital has gone up, and that changes all that dynamics exactly.
We didn't talk about management fees, but they are pretty comfortable. Generally it's about one percent or two percent peranum, plus some bonuses if you reach a certain the rate. But that's normal. It's very complex. These are i liquid market. They require a lot of expertise. And if you look at the teams of those infrastructure funds, and of course we meet them on a regular basis, those guys are really good.
Ah, I'm going to say the exact opset. You're smoking something there. I think they've been spoiled for the last fifteen years.
And the reason is is because none of them have to manage a power prant with anything more than an Excel sheet. It's been all done virtually and they've had no risk because basically everything they've produced they've got paid for it. They are now moving into a much more complex world where first and foremost they have to accept
that there's volatility in their power crisis. Secondly, you don't have these long term government back power purchase agreements in place, So the whole nature of the industry is changing, and I think it's going to be very difficult for a lot of these guys to make the changes that are needed to succeed over the next decade.
Okay, So no, no, no, you have to answer that. Do you agree where do you disagree?
You are great at doing theories. I look at what's happening, and if I take an example, which is no okay, JERRL, it's very clear you're always right in theory and wrong in practice, and me I'm always wrong in theory but right in practice. So that's why you're being a good team of showyn uk.
Okay.
If you look the past three months, we had Apollo who made a deal with Hosted for developing on C three six billion. Recently with KKR doing a deal with w e fifty percent of three kikawat under AR seven another three billion. So those guys DIAD invest now because it's of showIn, it's public auction, so the revenues are guaranteed for fifteen or twenty years. Otherwise they create their platforms.
We had the epizarre last year with emmanuel Le Geo KKR and the investing platforms, and those platforms, I can tell you you've got very competent guys. IPPs gone to a global and they manage their portfolio, they edge the trade. So everything you said, sorry, that's a bit of old school. The infrastructual funds have already found answers to the valiatility of their portfolio.
But I'm going to come back on that and I'm going to say you're mixing up private equity and infrastructure. The game in renewables has been all infrastructure. KKR is not an infrastructure investors, they're a private equity investor. So they're going in and creating the platforms that actually are suitable for managing these new renewable assets going forward, and they require and they get a higher return for what
they're doing. The infrastructure guys quite happy to just to get a single digit return and pay the dividend every quarter and everybody's happy that world has gone.
That's where I'm coming from, right, and your dead right.
There's some really compelent guys out there, and the KKR guys in particular, we like what they're doing around. We can't disagree with them anyway, you.
Know, Okay, Jah, before we go, we want to congratulate not Ballard, who came on our episode two hundred to talk about these two hundred slides while they're out and they are extraordinary. We put a link in the show notes.
Great Nash and I again, we haven't spoken this year. I'm just watch it. Goreage twenty twenty six.
Yeah, don't worries all over the other podcast. And finally, if you want to know more about the infrastructure, then we talk about it during our interview with Zach. The big event is in Berlin twenty four to the twenty seven of March. You've got more than three thousand infrastructure professionals there. So if you're into infrastructure investing, we'll put the link of the event in the show notes. Yep, a Ford that and the Unfortunately for you, I'm not going to sing this episode.
God when you said unfortunately, that could have meant anything.
Okay, my friend, to you next week look forward.
To Thank you for listening to Redefining Energy. Don't forget to rate the show and subscribe on Apple, Podcast, Spotify, or the platform of your choice.