Future-proofing IMCO’s infrastructure portfolio

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Featured Experts / Future-proofing IMCO’s infrastructure portfolio

Amid volatile energy markets, an uncertain inflation outlook and pressing climate change challenges, investor appetite for global infrastructure assets has remained unshakeable. We spoke with Tim Formuziewich, IMCO’s Managing Director of Global Infrastructure, to get his view on what it’s like to build a future-focused portfolio in today’s dynamic and rapidly changing environment.

How are you thinking about infrastructure investing right now? What’s IMCO’s focus in this space?

I don’t think there has been a more exciting time to be an infrastructure investor. We’re in a significant period of transition right now, first because the pandemic has waned somewhat and we’re seeing an economic recovery take hold; and second, because the transition to a low-carbon future is accelerating, creating compelling investment opportunities.

At IMCO, our focus is squarely on investing for the future. We’re positioning ourselves as ESG leaders in everything we do, building a portfolio of high-quality, sustainable assets. We’re investing in the most exciting and emerging areas of the energy transition at early stages of development to future-proof our portfolio.

A key challenge however is that there is a lot of capital pursuing green operating assets like wind or solar power so for the most part, investors must be prepared to pay a significant premium to gain access to that exposure. As a result, we’ve focused on investments in newer technologies – utility-grade batteries, hydrogen power, infrastructure for charging electric vehicles and so on – which currently have less capital chasing them right now. When we are buying established operating assets, we are doing so where this is substantial organic growth that can be pursued at cost. We are also partnering with likeminded and world-leading investors who are looking to the future and investing in newer assets.

Tell us a bit more about the end state of the portfolio that you’re building towards.

In five years, we want to have a program in excess of $12 billion with about 50% of direct investments and 50% fund commitments.

We are aiming for about 10 direct investments, with each being individually significant to the program. We want to be actively engaged and make a significant difference with respect to either increasing returns or reducing risk of the investment. We’re making sure the portfolio is diversified appropriately, and that we are focusing on assets that the world will be talking about for the next 20 or 30 years. And on the fund side, we want to work with five or six key partners where we have deep and meaningful relationships, values alignment and access to a pipeline of differentiated deal flow.

We’re investing in the most exciting and emerging areas of the energy transition at early stages of development to future-proof our portfolio.

Are you concerned about rising inflation?

We think the combination of government support to stimulate demand, global supply chain challenges, and the cost of the energy transition have and will continue to drive inflationary pressures, exiting the pandemic. We’re trying to build a portfolio that delivers absolute returns while offering inflation protection. Our two most recent investments—Green Frog and AusNet—are examples of that. Both have direct linkage to inflation. It’s also important to remember that energy has a big impact on inflation rates. When you look at what factors into the rate of inflation, while it is somewhat varied country-to-country, energy prices, housing cost and food are typically key components. Within housing and food, energy is once again a critical driver of costs. In infrastructure we generally try to avoid commodity exposure by investing in energy assets that are able to pass on inflationary costs.

What parts of the world do you see as most compelling in terms of investment opportunities? Has COVID-19 changed that view?

We’re looking closely at those parts of the world where the energy transition is most advanced. That’s the UK and some parts of Europe, as well as Australia and parts of the U.S. – regions where you’re seeing solar or wind power account for as much as 30 percent of total power generation, for instance. That’s where we’re seeing the most opportunity in terms of assets that would make a strong fit in our future-focused portfolio.

COVID-19 hasn’t altered that focus, but it has certainly been challenging for us in some ways. A key success factor for us is to build relationships for the long term. We are sometimes asking partners to make a decade-long commitment to us that can be difficult to do if you’re meeting someone for the first time over Zoom. Attracting and managing talent is also a challenge when we are working remotely. Having said that, we’ve also learned many great lessons from the pandemic. For example, we know we can be effective while working remotely and that we can also use technology to perform due diligence remotely.

What role does diversity play in IMCO’s approach to infrastructure investing?

We know that diversity drives better business outcomes so while professional experience is valuable, bringing together diverse viewpoints and life experiences is critically important to thinking through challenges and opportunities that few others have faced.

To that end, we have made efforts to build diversity into our investment team and are focused on improving diversity at the board of director and senior executive team levels of our portfolio companies. We are requesting our management teams report on key diversity metrics such as gender pay equity. We are having similar engagement with our key fund partners, insisting the advisors we work with are diverse. We turn down investment opportunities when the board and management teams offer no diversity unless there is a clear and absolute commitment to change, because we believe it’s essential that our values and those of our clients are reflected in our activities including in how we engage with our portfolio companies. This isn’t always easy, but small and meaningful steps do add up over time. Today, all portfolio companies of our infrastructure program—where we have governance rights—have diversity on their board of directors and management teams, and 33% of our shareholder-nominated board members are diverse. There is still significant work to do and we are committed to doing more.

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