![In the long run: Infrastructure assets – benefits for societies and stable returns for investors](/-/media/allianzgi/eu/regional-content/update-magazin/iii-2018/2304x1296-investion-in-infrastruktur.jpg?rev=-1)
Summary
Infrastructure is the prerequisite for social well-being and economic growth. However, in many countries not enough investments are made in infrastructure. This investment gap has widened as governments are financially strained from the sovereign debt crisis and from ever growing retirement and healthcare obligations. 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.
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Update Magazine III/2018 |
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)
![World average annual Infrastructure Investment Need (2017–2035)](/-/media/allianzgi/eu/regional-content/update-magazin/iii-2018/investitionen-in-infrastruktur/en/graph-a.png?rev=-1&hash=06D9A6FA8C78C21BB180643C747D726D)
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)
![European average annual Infrastructure Investment Need (2017–2035)](/-/media/allianzgi/eu/regional-content/update-magazin/iii-2018/investitionen-in-infrastruktur/en/graph-b.png?rev=-1&hash=FA6A2BF19544E7ECF4AD5A5D49659ABE)
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.
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![How monetary policy can worsen economic inequality](/-/media/allianzgi/eu/regional-content/update-magazin/iii-2018/2304x1296-ungleichheit-geldpolitik-2.jpg?rev=-1)
Summary
Income and wealth inequality have increased significantly since the early 1980s. This is true not only of developed industrial countries, but also of emerging countries, with few exceptions. The trend in the United States is particularly striking: the Gini coefficient – a common statistical measure of inequality – is at its highest level since the 1930s. A convergence of other factors is also sparking more debate over inequality, including: the tailwind for populist parties and politicians since the mid-1980s, especially since the outbreak of the financial crisis; the use of unconventional monetary-policy instruments; and historically low, and in some cases negative, nominal interest rates.