Ports, planes and power grids: investing in the infrastructure boom

Family offices’ love of tangible assets mean that most will be tempted to invest in Europe’s crumbling infrastructure, but there are warning signs regarding political risk and product quality.

Infrastructure is a new buzzword across Europe. A recently elected Labour government in the UK is doing its utmost to reignite a long-extinguished industrial flame, fuelled by a raft of new infrastructure investments.

These include Middle Eastern logistics giant, DP World, pumping £1bn ($1.3bn) into shipping berths and warehouses at the London Gateway port; Spanish utility Iberdrola injecting £10bn into offshore wind farms; and a £1.1bn Stanstead Airport investment, spanning terminal expansion and construction of a new solar farm.

While some wealthy families are keen to get involved in the boom, others are more hesitant, troubled by perceived political instability and lack of suitable investment vehicles.

“There are big problems in infrastructure, not just in the UK, but also in Germany and Italy,” says Chris Kaelin, CEO of the Henley & Partners consultancy, which helps wealthy families relocate to different jurisdictions. “Bridges are also collapsing in the US, where roads and railroads require huge resources, as there is not enough ongoing investment.”

His fear is that because wealthy families are leaving the UK, due to a of lack of investment in infrastructure in transport and health services, a vicious circle is being created, because it is precisely these investors who are most likely to inject funds into construction efforts.

“A lot of people are thinking of leaving the UK, not just for non-dom reasons, but the general direction of the country is not feeling favourable for international wealthy families,” he says. “Wealthy businesses want to invest in the infrastructure around them. No governments should chase away wealthy people, as they are the ones who drive investments. When they leave, the investments leave too. They create jobs and bring in innovation.”

Water treatment

Most investment players say these investments have started, even though they may be moving without the much-needed momentum being hyped by European governments.

“Infrastructure is not at the level that it will have to be for how we operate our economies in the future,” says Nannette Hechler-Fayd’herbe, chief investment officer for Emea at the Lombard Odier Group in Geneva.

“If you think about it, some infrastructures in developed markets are very old indeed. Water treatment and distribution infrastructure in the UK in the City of London dates back nearly 100 years. That’s why we are looking at all types of infrastructure, where companies are participating in increased spending.”

This includes both direct investment in projects and buying into listed companies participating in the boom. Electric vehicles and charging networks which support them are of particular interest at Lombard Odier.

“Infrastructure in the UK remains a huge investment theme for asset managers and there is a significant number of opportunities for Infrastructure debt managers, echoed by institutions looking to invest in this asset class,” says Jean-Francis Dusch, managing director of Edmond de Rothschild Asset Management in the UK and investment director of the group’s BRIDGE platform, investing in infrastructure projects linked with sustainable development and ESG principles.

“Large family offices are also interested and some debt products with double digit returns may attract their liquidity and bring additional funding to the UK’s infrastructure projects.”

He draws attention to investments including BRIDGE’s Yield Plus Growth strategy, which supports growth of projects in energy and digital transition spheres. “ESG is embedded in infrastructure,” says Mr Dusch, whose funds are regulated under Article 8 of the March 2021 EU SFDR Directive.

“ESG is incorporated in our investment process from sourcing, structuring specific covenants, impact measurement of CO₂ emissions avoided and alignment to the 2050 global warming reduction targets, plus reporting of each asset invested.”

Energy transition

The energy transition, according to Mr Dusch, is happening across all infrastructure sectors, including renewables and sub sectors such as battery storage, hydrogen, transport and green mobility, digital infrastructure, and decarbonisation of utilities.

Investments in wind and solar power are among the most attractive for family offices. “This has become part of the core infrastructure play and there have been significant opportunities for almost three decades,” says Mr Dusch, referring to the EU Fit for 55, which aims to decrease CO₂ emissions by 55 per cent by 2030. “This has further accelerated the growth of renewable energy and is also creating the need for battery storage to manage the intermittent production and feed a constant flow to the grid and users,” he says.

Middle Eastern families in particular are interested in renewable energy and electric cars, although there is a desire to see vehicles manufactured more cheaply in Europe, to counteract current Chinese dominance of this market, says Sohail Jaffer, managing director of Genesis Consulting in Luxembourg, and former regional head of alternative investments at Citi.

“Renewable energy is a variation on the real estate theme, because it’s something you can touch and feel, which is infrastructure,” he says. “It’s not about intellectual or property rights. These guys like to be able to have tangible assets.”

While most wealthy investors are already overweight in their real estate allocations, they are generally willing to consider extra allocation to other so-called “real” assets, says Paul Whelan, director of UK wealth management for Swiss private bank Mirabaud.

“The richest investors like to see something tangible, adding a broader value to society, and they like that. But the challenge is that it’s a long-term investment, with a seven-year lock-in period to generate returns.”

He previously worked at Credit Suisse, where direct infrastructure investments were typically rolled into structured products. “We bought into a Spanish toll road, that was guaranteed to generate returns, but then Covid happened and no one was using the road,” he recalls. “But if it works, it’s a very effective use of capital. It has a low correlation to the liquid market experience, especially in recent times when that has been so tech oriented.”

A variety of assets can be attractive for wealthy families, suggests Mr Whelan. “There are the classic heavy infrastructure plays like trains, roads and planes, but there is also much more modern infrastructure, which will transform economies, including telecoms and substack security, plus crossover with the green movement.”

For the vast majority of investors, a fund-based approach is preferred, as asset managers are able to best provide investment expertise and structure for efficient vehicles. A broad but cautious interest in infrastructure is typical of most family offices, although engagement can still be sporadic. “Data centres are probably the most popular real asset now,” suggests Jack Ablin, chief investment officer of Cresset Wealth Advisors, which runs assets for wealthy families in the US. “We’re interested in clean base power. Nuclear holds promise.”

No plain sailing

But there are also several reasons why wealthy families – particularly in the UK – can be reluctant to invest. It will not be plain sailing for investors, confirms Mr Dusch at EDRAM. “Although this is an established sector, there are key challenges linked to the need for solid and proven regulation and some stability in energy prices, which has been the case apart from in 2023.”

The chief investment officer of a family office linked to a UK manufacturing company, which has recently moved from the UK to Italy, says a combination of post-Covid impact and lack of commitment from UK authorities has clouded ambitions.

“Investment in infrastructure needs stable government decision making, which we don’t currently have in the UK. There are also societal problems and tax perspectives,” he says.

“Covid changed the whole infrastructure and airports model. Everything was depending on footfall, on disposable income for sales in the airports. You were able to get infrastructure like returns from the airports, but Covid changed all that.”

While Mediolanum Asset Management in Dublin has launched a fund investing in “green buildings”, both residential and commercial, the firm’s CEO Furio Pietribiasi warns investors not to get carried away with “fashionable storytelling” if the proposed investments cannot be properly structured.

“So when you go to your client and tell them you are building a strategy meant to embrace a theme, you need to be able to show them the companies and explain why the companies tick the box,” he says. “This is very important, because otherwise, you end up with the with the same usual suspects of the top ten, similar to normal automative or aircraft funds, without building any real diversification for clients.”

Carbon footprint warning

Investors must also be careful they are receiving what they look for in their investment strategy. “The initial carbon footprint of wind farms can be vast before the payback period, so we need to look at these things with a clinical eye, as there is a danger of greenwashing,” says Mirabaud’s Mr Whelan. “Electric cars are also a classic example of that.”

Investors must also be keenly aware of the political dimension, which is never far from investment calculations when it comes to infrastructure-related investment projects.

“The larger the project, the more influence politics will have,” he says. “Take our latest high-speed rail line, HS2 for example, where the ramifications for returns can be substantial. You can be on the end of the government scrapping a project and the return profile of these changes can be significant.”

For the right client, believes Mr Whelan, some exposure to infrastructure is a good thing, provided it is part of a broader revies of asset allocations. “The danger is that people hear the buzz and suddenly put half their portfolio in, which is not ideal. Two or 3 per cent would be a more suitable allocation,” he says. “As clients’ wealth goes up, they can increase their allocation.”