Infrastructure, Changing the Definition

In APFC Perspectives by Paulyn

Changing the definition

Investments in infrastructure, the backbone of those things societies depend on every day, have proven their ability to generate consistent revenues over the long term. Since 2007, APFC has been investing in infrastructure assets in the United States and internationally.  The definition of infrastructure itself has continued to expand and evolve over the years. The asset class used to primarily consist of utilities, transportation assets, waste, and water systems. Today, the asset class includes telecommunications infrastructure such as cellular towers, fiber optic networks, and data centers; renewable electricity generation, energy storage, and social infrastructure such as specialty healthcare facilities. Investments in assets that were once considered risky, like telecommunications assets or renewable power generation, are now quite common.

With this change in mindset, investment management organizations like APFC have seen these assets gradually shift from higher-risk private equity portfolios into their infrastructure portfolios. With its agile structure and flexibility, APFC is able to identify interesting opportunities and support expanding infrastructure investments. By making long-term investments in infrastructure, APFC is also able to provide consistent returns and diversification to the total Permanent Fund portfolio.

“What’s been exciting and where I think we’ve really been able to add value is our ability to think creatively and act quickly.” Says Ross Alexander, APFC’s Infrastructure Portfolio manager. “I think the flexibility of our capital has been beneficial, allowing us to look at different types of assets and structures that others may pass up.”

Engineered for returns and diversification

Ever since the portfolio was established, the objective has been to find assets that are resilient through economic cycles, and have defensive characteristics, such as assets that are considered essential services and have contracted or highly predictable cash flows. APFC’s approach for managing an infrastructure portfolio is similar to one for private equity. Through active ownership, investment returns are generated more from capital appreciation than recurring cash flows or consistent income distributions, as expected with core Real Estate or Fixed Income investments.

Generally, diversification can lower a portfolio’s risk, and it’s no different with infrastructure. Approximately 40% of APFC’s infrastructure portfolio is invested in North America, 40% is invested in the UK and Europe, and the remaining 20% is split between Latin America, Asia, and other emerging markets. Much of the emerging markets’ exposure is in digital infrastructure or power generation, such as developing solar and wind farms, providing a reliable source of electricity where there often wasn’t before.

With a value of more than $3 billion, APFC’s Infrastructure Portfolio has grown big enough to invest alongside the most significant funds in the world yet remains nimble enough to continue working with smaller partners that bring their own unique opportunities. APFC leverages outside consultants as well, to enable management of the entire infrastructure portfolio with a small team.

How does APFC participate?

APFC’s Infrastructure portfolio is approximately 90% invested in private companies, often through commingled funds where external managers raise pools of capital from institutional investors such as pension funds, endowments, and sovereign wealth funds. As a long-term source of capital, the Permanent Fund’s structure and return objectives work well with the longer time horizon of these private investments. The longer time horizon of private investments also allows fund managers to think differently about the company, assessing what can be done over the years of ownership to make it more efficient, reduce costs, or expand operations to make it more valuable. The remaining 10% of the portfolio is invested in publicly traded companies which often strive to achieve shorter-term results.

Over the 10-year investment lifespan of a typical closed-end infrastructure fund, the first 3-5 years are defined as the investment period, where APFC and other limited partners provide capital as needed to acquire or create businesses or assets.  During years 6-10, the investment manager works to improve or expand operations and then looks to exit the investment.

For the long-term

“APFC’s infrastructure investments exhibit investment characteristics that are additive and complementary to the Fund’s other asset classes.” Says Marcus Frampton, APFC Chief Investment Officer, “Specifically, if global economies have entered a higher inflation regime, as many economists expect, APFC’s infrastructure assets could provide attractive real returns.” Frampton goes on to say that conversely, “In a more recessionary scenario, the critical nature of these assets should result in defensive attributes to the investment profile.”

Because of the unique characteristics of infrastructure assets, many investments have seen limited impacts or even outperformed despite the current inflationary environment. These returns highlight the portfolio’s ability to offer inflation protection and mitigation of downside risks to the Permanent Fund.

As the needs of our societies continue to change, the definition of infrastructure will also continue to evolve. APFC remains active in making new infrastructure commitments across asset types, geographies, and structures with a focus on diversification and maximizing risk-adjusted returns over a long horizon. APFC will continue to seek and identify interesting infrastructure investment opportunities to grow and strengthen the Permanent Fund for the benefit of all generations of Alaskans.