Update Magazine III/2018 › Download the complete magazine

1 Importance of infrastructure

Infrastructure is the prerequisite for social well-being and economic growth. However, there are many infrastructure gaps around the world. The McKinsey Global Institute (MGI) showed in a discussion paper last year that the world would need to invest USD 3.7 trillion per year in infrastructure, such as rails, airports, roads and energy, in order to keep pace with projected growth. This problem is not confined to emerging markets only.

Also in Europe infrastructure investments are essential to preserve the region’s competitiveness. MGI estimates an annual investment need of USD 500 billion, and a gap to the current actual spending of USD 48 billion per annum. This gap has widened as governments are financially strained from the sovereign debt crisis and from evergrowing retirement and healthcare obligations. Moreover, we are seeing the retreat of traditional bank lenders in response to Basel III and other regulations. As a result, there will be a growing number of infrastructure projects that match our profile as an investor who is investing in assets that provide essential services to the public, and are supported by regulated or contracted revenues, or a strong market position.

2 Infrastructural gaps in Europe

While Europe has decent infrastructure compared to other regions, the asset base is aging and needs to be renewed. In addition, most infrastructure sectors are undergoing fundamental structural changes that require vast amounts of capital over the foreseeable future. The energy sector, in particular, is in a stage of transition caused by the push for de-carbonisation, which is a top priority for many European economies. The replacement of conventional generation, decentralised energy sourcing and the electrification of certain sectors require investments in new generation capacity. Moreover, the power grids need to be strengthened, and more storage capacity will have to be added to the system. In the transportation sector a number of technological disruptions will further shape the industry, such as the rise of autonomous vehicles, ride-sharing or the emergence of e-mobility. Telecommunications is another sector where we see high investment needs, with the explosive increase of data traffic and the overriding political objective to overcome structural differences, not only across Europe but also between cities and rural areas. An influx of capital is also expected in the environmental sector, if you take the water infrastructure as an example. Climate change, population growth and ongoing urbanisation are posing major challenges to the water supply globally.

A/ World average annual Infrastructure Investment Need (2017–2035)

Average annual infrastructure investment needed – McKinsey Global Institute. Data as of october 2017

3 Allianz Capital Partners investment approach¹

So far as we have exclusively invested the money of pension schemes and insurances of regional Allianz companies in infrastructure, we are clearly a long-term investor. On that basis we follow a "buy-and-hold" approach, with regular cash flows in order to match pension and insurance liabilities when they fall due. Allianz Capital Partners is focused on alternative equity investments in private equity, renewable energies and infrastructure. As of November, total assets under management amounted to EUR 12.3 billion for private equity, EUR 9.7 billion for infrastructure and EUR 3.9 billion for the renewables sector. In infrastructure, we predominantly invest directly in the capital of companies or joint-ventures that develop infrastructure projects. As an equity sponsor we normally invest alongside likeminded and experienced international investors. We seek a governance regime of strong veto rights that puts us in position to influence the company on important matters.

Given the focus on cash yield and our buy-and-hold approach we need to take a long-term view on our assets and the environment they operate in. We typically get comfortable in situations where the investment satisfies the following criteria: a) businesses underpinned by ownership or operating rights of real assets b) cash flows backed by established regulatory regimes or strong contractual protection that provides downside mitigation c) compliance with strict Allianz ESG principles d) markets with a proven track record in dealing with private investors e) high barriers to entry and low substitution risks owing to asset-specific attributes, and last but not least, premium assets providing essential services to economies and society. As to using leverage, we always target investmentgrade financing structures, and seek long-term tenors to mitigate interest rate exposure.

4 Long-term buy-and-hold approach

Infrastructure assets are by definition long-life assets, often with a high public profile, and sometimes directly customerfacing. Owners of infrastructure assets need to act as responsible custodians of critical assets that provide an essential service to society. One of the benefits of being a long-term buy-and-hold investor is that we at Allianz Capital Partners can invest with a view to delivering both a public service and value generation to its investors over the whole life of the asset, rather than maximising short-term gains.

As a minority investor, we work actively alongside and in alignment with other co-investors to ensure that the business plan is delivered. A consequence of successful and responsible asset management is that it enables us to be seen as an attractive partner for new deals.

People are always key to success. Having the right executives in the right positions with a full understanding of the key value drivers of the business plan and strong alignment with shareholders is fundamental to successful asset management.

Finally, asset management involves managing risks in a business, and identifying opportunities to make the business more efficient – and grow it. We seek to de-risk the businesses in which we invest in a number of ways, including by adopting conservative long-term investment-grade capital structures. Asset management also sees each business as a platform with potential for growth – whether organic or through acquisition – and seeks to pursue new investment opportunities through its existing asset base.

5 Impact of environmental, social and governance factors

Allianz is at the forefront of ESG-compliant investing, and has adopted a socially responsible approach since 1991. Just recently we have been recognised by the Dow Jones Sustainability Index as the most sustainable insurer worldwide. As an affiliate of Allianz we have incorporated the Group’s strict ESG guidelines in our investment decision and asset management approach, and are fully integrated into the Group ESG framework.

B/ European average annual Infrastructure Investment Need (2017–2035)

Average annual infrastructure investment needed – McKinsey Global Institute. Data as of October 2017

6 New investments in the pipeline

European deal activity remains high in our core sectors of energy, transportation, environmental and telecommunication. We have identified potential investment opportunities of more than 10 billion Euros that may become executable in the short to medium term. For example, we are currently actively pursuing a number of transactions in the subsectors of integrated utilities and, fibre networks, as well as certain transportation segments. We also keep pursuing greenfield investments and are, for instance, involved in “NeuConnect”, a 1.4 GW power interconnector that seeks to transmit electricity generated in Germany to Great Britain and vice versa, through a 650km subsea cable. We will soon be able not only to allow Allianz Group entities to benefit from this attractive asset class, but will also extend this offering to other institutional clients.²

1) Allianz Capital Partners – http://www.allianzcapitalpartners.com/imprint – is the Allianz Group’s in-house investment manager for alternative investments, and has been an independent unit of Allianz Global Investors since January 1, 2018.

2) Allianz Capital Partners obtained the AIFMD licence on 22 October 2018 from German Supervisory Authority BaFin.

Investing involves risk. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management‘s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. We assume no obligation to update any forward-looking statement. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. There is no guarantee that the strategy will succeed and losses cannot be ruled out. Investors may not get back the full amount invested.

The volatility of fund unit prices may be increased or even strongly increased. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.

This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or particular needs of any particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and/or its affiliated companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.

Contact the issuer electronically or via mail at the address indicated below for a free copy of the sales prospectus, the incorporation documents, the latest annual and semi-annual financial reports and the key investor information document in English. Please read these documents – which are solely binding – carefully before investing.

For investors in Europe (excluding Switzerland): This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42–44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established branches in the United Kingdom, France, Italy, Spain, Luxembourg and the Netherlands. Contact details and information on the local regulation are available here (www.allianzgi.com/Info).

For investors in Switzerland: This is a marketing communication issued by Allianz Global Investors (Schweiz) AG, a 100% subsidiary of Allianz Global Investors GmbH, licensed by FINMA (www.finma.ch) for distribution and by OAKBV (Oberaufsichtskommission berufliche Vorsorge) for asset management related to occupational pensions.. Details about the extent of the local regulation are available from us on request.

This report does not satisfy all legal requirements on the guarantee of impartiality in investment recommendations and investment strategy recommendations and is not subject to any trade restrictions prior to the publication of such recommendations. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted.