NordicInvestor interviewed Christoph Junge, Head of Alternatives at Velliv, Denmark’s third largest commercial pension company, to find out how they select infrastructure managers. Velliv invests through external infrastructure funds, and sometimes does club deals with other pension funds in the Nordics.
Do you invest in infrastructure debt or equity, and publicly listed or private assets? Which do you prefer at different stages of the cycle?
Christoph: We do invest in private infrastructure equity but could potentially also invest in private debt. Given the long-term nature of this asset class, we are not trying to time the cycle but to build a portfolio that has the characteristics we want to achieve with this asset class. Our focus is on contracted or regulated assets that can deliver somewhat stable returns and inflation linkage. The profile of listed infrastructure can deviate substantially from the assets available on the private market. Our colleagues on the equity desk may invest in publicly listed infrastructure.
Do you like mega market, mid-market, or smaller deals?
Christoph: It all comes down to having the right manager with the right skillset for the different parts of the markets. While some larger assets certainly are traded at higher prices due to “trophy status”, the mega-cap transactions are typically only accessible for very few investors implicating less competition. And this is not only marketing language from some mega-cap managers as EDHECinfra also found that the size factor systematically attracts a positive premium as the largest assets typically are more illiquid and complex. This is the opposite of what we can observe in public markets where small caps typically are less liquid and attract a positive premium. On the other hand, the right manager can also extract value from smaller deals, for example by buy-and-build strategies through bolt-on acquisitions. This requires a different skillset than pulling off mega deals. My impression is that upper-mid and large cap are the most crowded parts of the market.
Do you invest in US, Europe, Developed Asia, emerging markets, frontier markets?
Christoph: Our focus is on Europe and Northern America, but we have also invested in some global funds with both Developed Asia and EM exposure. Frontier markets are currently not part of our strategy as the risk would not fit our overall goal with the infra allocation – namely stable returns.
Where do you see the best value now?
Christoph: Again, it comes down to what you want to achieve with your infra allocation. Our focus is on identifying the right manager, the mega trends in the markets and to build a resilient portfolio that delivers on our goals. Some of the sectors we like are linked to the digitalization and decarbonization of our world but also essential, quasi-monopolistic services like district heating or water & waste. We pay our managers for selecting the right assets and we take care of the overall portfolio construction of our infrastructure program to make sure that no single risk becomes dominating. For example, even though I like the contracted nature of renewables I am also aware of the power price risk once the PPA (power purchase agreement) runs off. Not to mention the technological risk. The life span of these assets is typically a lot longer than the PPA’s and leaves the residual value at risk. From a portfolio perspective it makes sense to keep this risk balanced and to also invest in other assets like storage or electricity grids as they benefit from the overall push towards electrification but are independent from the generating source of electricity. Portfolio construction is where I see the best value, not whether renewables are priced to perfection or not.
Do you feel comfortable with leverage at the project level, fund level or both? Have leverage costs risen this year?
Christoph: Leverage on the project / company level is market standard and we are comfortable with that. Of course, some assets can carry higher leverage than others, but I’d prefer not to over-lever for the sake of IRRs. I haven’t come across fund level leverage in infrastructure yet, only in real estate, and I prefer to keep it that way.
Do you invest in evergreen or closed end fund structures? What maturities make sense for closed end funds – 5,10,20 or more years?
Christoph: We have invested in both and both make sense depending on the strategy. For pure core infrastructure assets, evergreens or 15 – 20-year closed end funds make more sense. In my opinion, these types of assets are not suited for PE-style asset flipping. For funds focusing on greenfield projects or investors with liquidity needs a closed-end structure can be more suitable.