What we really need.
Infrastructure. Those looking for stable and high-yield investments have long been able to find interesting investment opportunities in the infrastructure sector. "We are now setting up a strategy that differs significantly from traditional funds in that it focuses on the mid-market segment and has an endless term," says Heiko Schupp, Columbia Threadneedle. "This offers a chance for higher profitability."
"Did you know that hydropower accounts for 17 percent of Italy's energy mix? It is so important for the energy supply that it is supported by the government and regulators," explains Heiko Schupp, head of the infrastructure team at Columbia Threadneedle.
If it were now possible to acquire such a power plant at a reasonable price, investors would have a wonderful investment in a company that has a kind of monopolistic market position on the basis of long-term contracts or concessions and promises low risk and stable earnings thanks to guaranteed feed-in tariffs and high energy demand. "These are exactly the kind of projects we are looking for in our infrastructure strategy."
Heiko Schupp has been active in the field of infrastructure for more than 23 years. "This is an enormously exciting growth market. In Europe alone, the investment volume required by 2040 will be 460 billion euros per year. That is about 100 billion more than the German federal budget. Because states can never handle this alone, there are countless opportunities for investors to buy companies. We just have to do it right."
What "right" means in concrete terms is outlined by the experienced investor using four factors. "We are not setting up a closed-end fund, but are setting up a so-called evergreen strategy, without a fixed term and predetermined volume. We focus on small and medium-sized enterprises in Europe. We combine the individual companies in such a way that their overall results remain stable as independent as possible of the economic cycle. And we consistently focus on sustainability," explains Schupp.
Especially the Evergreen strategy is unusual. Infrastructure funds usually collect capital and capital commitments. If sufficient funds are available, the fund is closed and the investment process begins. "From experience, we know that what you buy is of secondary importance. Much more important is when you buy," explains Schupp. "We do not want to have to invest at any price because we have capital right now, but will ask our investors for capital in the form of capital increases when lucrative investment targets open up. If you can wait, you have a clear advantage in this business."
Another point speaks for the evergreen structure. For a long time there were no major changes in the infrastructure business. However, due to digitalisation and the innovations in regulation, drastic changes are now to be expected in areas such as data transmission, transport or energy.
"After the first investment, we must always be able to provide our companies with fresh capital. We are a very active investor who also provides intensive operational support and assistance to his companies. This is the only way we can jointly take advantage of the opportunities that present themselves in a rapidly changing world. That is why we also need access to fresh capital," explains the expert.
There are also good reasons why he is concentrating on Europe. "On the one hand, the European Union provides you with a high degree of legal certainty, and on the other, the infrastructure is probably of the highest quality in the world. It would be particularly worthwhile to take a close look at the segment of smaller and medium-sized infrastructure providers. "This has something to do with supply and demand and therefore with price formation," says Schupp.
According to data provider Preqin, 76 billion euros of capital for infrastructure investments were raised by professional investors in Europe in 2018. At almost 46 billion euros, far more than half of this flowed into the very large funds with a volume of more than two billion euros. "Accordingly, these investors usually focus on large deals and often buy directly from the government, listed corporations or other funds. There is hardly any room for negotiation and the very intense competition is driving prices up."
On the other hand, competition for the best investments in the mid-range segment is lower. According to Prequin, for example, last year only 5.3 billion euros or seven percent of the capital went into this area. At the same time, most deals take place there - 77 percent of all deals had a volume of less than 500 million euros.
"Sellers are often municipal utilities, entrepreneurial families or industrial companies. In the past, it might have made sense for an Italian textile manufacturer to obtain its energy from its own hydropower plant. Today, such a power plant would have to be adapted to the latest requirements. But in most cases neither the capital nor the know-how is available," says Schupp. For the investor, this constellation meant that he could obtain more favourable prices and negotiate concessions or exclusivity. "The investment will become more profitable."
Once Schupp and his team have identified a target object, it is important that it also fits into the portfolio context. "We want to have a well diversified portfolio in terms of economic development. The spectrum of infrastructure is huge - from utilities, renewable energies, transport, social facilities such as schools or hospitals to telecommunications."
In the different phases of an economic cycle, according to Schupp, the individual areas would also develop quite differently depending on inflation and the level of interest rates. "A power station or renewable energies don't work so well in a boom where interest rates are usually high. A port or a toll road, on the other hand, is," explains Schupp. By combining the companies in an appropriate way, their strengths and weaknesses balance each other out in the individual economic phases, and the overall returns in the portfolio hardly fluctuate.
As a third important point in the selection process, Schupp mentions the exclusive consideration of sustainable investments. "Since we invest for the long term, our investments must be sustainable. If you buy something today that isn't sustainable, somebody will come and take your profits."
Twelve experts at Columbia Threadneedle therefore check all of the plants for the so-called SDG criteria - whether a company is in line with the 17 sustainability goals of the United Nations. There are also exclusion criteria. "For example, we don't invest in coal. For the future viability of this energy source is not in good shape. All in all, we are aiming for an average annualized net return of eight to ten percent and a dividend yield of five to six percent." ®
Special Release: Columbia Threadneedle
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