Many global asset managers are actively diversifying and expanding their platforms with infrastructure assets, but what is driving these moves into non-real estate?
There is a joke in journalism. Question: How do journalists count? Answer: One, two, trend.
So, at the end of September when Patrizia said it was taking over infrastructure company Whitehelm Capital and a week later Nuveen said it was ‘launching’ Nuveen Infrastructure and Nuveen Natural Capital, it was time to investigate.
We spoke to both companies to find out more and sounded out advisors in the market to put the wider trend in focus. They say many global asset management platforms – whether they are bank-owned, publicly listed or private investment firms - have been actively diversifying and expanding their platforms. Those that have lacked a presence in a significant asset class such as real estate or infrastructure have been frankly desperate to enter.
There are many examples to pick from going back years. One of the most recent was last October when London and New York-based global asset manager, PineBridge Investments, acquired Benson Elliot Capital Management, the UK-based private equity real estate fund manager.
One advisor said many companies including PineBridge have made moves to broaden their scope, diversify their income streams, and last but not least, to meet client demand for returns from long income, defensive, and durable assets.
At the time of PineBridge’s deal, here is what CEO Greg Ehret said: ‘Real estate is a strategically important asset class for institutional investors, such as pension funds and insurance companies who are looking to meet their long-term investment objectives, especially during a period of low interest rates.’
In other words, PineBridge wanted Benson Elliot because there were lower returns in its core fixed income market, and it was looking for a wider platform to boost income.
Broadly speaking, Patrizia buying an infrastructure company is no different. It is a smaller step arguably than a fixed income player buying a real estate manager, but it is still playing into demand among institutional investors who are pivoting towards real assets as a diversifier, offering resilient, defensive qualities and steady cash flows.
James Park, a New York-based partner at Sera Global within its real estate investment banking team, says: ‘It makes sense that firms would be looking to expand their capabilities across similar types of investments. What is real estate ultimately? It is ultimately a stream of cash flows, and so is infrastructure.’
He is not alone in pointing out such fundamental similarities between real estate and infrastructure. Indraneel Karlekar, global head of research & strategy at Principal Real Estate Investors, wrote in a paper on the topic over the summer: ‘In a sense, real estate could not independently exist without infrastructure, and infrastructure would be of little use without the supporting real estate. As real assets, they also act as a source of capital preservation and appreciation – an important goal for most investors.’
He continued: ‘Some forms of commercial real estate have similar characteristics to infrastructure, whether through lease design, indexation or liability. This increasingly blurs the lines between real assets, making the distinction between real estate and infrastructure less evident.’ He went on to highlight warehouses and logistics, data centres, affordable housing, medical offices and care homes where the lines are blurred.
Of course, infrastructure still requires operating expertise. This is why Patrizia analysed the whole market for a best-in-class infrastructure manager to get it right. Sources said that co-CEO of Patrizia, Thomas Wels, brought in a former head of infrastructure at UBS Asset Management as an advisor to help run the rule over potential acquisitions. At UBS, Wels was head of real estate and private markets, so the writing was on the wall when he joined Patrizia in May 2020 that he would be broadening asset classes. It is no surprise he should turn to a former UBS colleague to help.
Higher returns
Crucially, advisors PropertyEU has spoken with say that returns from infrastructure have outperformed real estate, thus providing another reason why a real estate manager might want to add infrastructure.
This can be seen in the public as well as private markets. In March, share trading platform Interactive Investor showed how UK property fund stocks had huge discounts to net asset values whereas infrastructure funds such as 3i Infrastructure were trading at a premium.
Some anecdotes shared with PropertyEU are relevant. One of the largest global financial consultants has a head of property within its real assets group. As well as advising clients on making investments with third-party fund managers, the consultant also manages a real assets fund of funds. Internally, the head of real estate cannot get ‘air play’ because the other asset classes within real assets are performing better. The reality is real estate is having to compete for allocation – and is often losing out – to asset classes such as infrastructure.
This, say experts, is quite a recent phenomenon. It was not the case five years ago and has possibly been accelerated by the Covid-19 pandemic.
A different advisor who specialises in real estate fundraising and was working on a major European fund up until a few months ago told PropertyEU of their experiences. In most cases where an investor was choosing between real estate or infrastructure, the investor invariably opted for infrastructure.
Ticket sizes
Ticket sizes are another issue. The amounts that institutional investors are prepared to pay to infrastructure managers are typically much larger than for real estate funds. For example, an institutional investor that might commit €50 mln to a real estate fund will likely commit twice that amount to an infrastructure fund. That is despite there being arguably fewer investment opportunities.
This is a clear difference between real estate managers and infrastructure managers. Investors are happy to write these bigger ticket sizes to infrastructure managers, and consequently they have larger funds. At the same time, consolidation among infrastructure managers has been taking place, resulting in their funds becoming bigger and bigger. One logical conclusion of this is infrastructure is attractive to an investment firm looking to grow its AUM.
Eoin Bastible, a partner in Sera’s private capital advisory service in London who specialises in both real estate and infrastructure, says: ‘There are dramatically fewer infrastructure managers than real estate managers because infrastructure is a comparatively nascent asset class. When investors connect with them, they tend to make much larger investments.’
He points out that when he started in real estate, most pension funds had an allocation to real estate of somewhere between 3 and 5%. Today, the vast majority are closer to 8 to 10%-plus. In Germany, the figure can be as high as 20 to 25%.
But very few have any allocation to infrastructure. This is set to change as they now have aspirations to grow allocations to infrastructure to 5%. When one adds private credit to real estate and infrastructure, private markets is becoming a ‘30%’ asset class when it used to be only 10%. ‘There has been an enormous shift,’ says Bastible. ‘If you are on the other side, say in active or passive equities or fixed income, you need to be in this space.’
As PropertyEU has reflected in previous articles, there is a clear morphing and shifting of barriers between ‘separate’ private market asset categories. So much so that global firms are organising themselves around ‘real assets’.
Sera Global is playing into this trend by calling itself a global ‘real assets’ advisor. Patrizia is now calling itself a ‘leading partner for global real assets’ when it used to refer to itself as a leading pan-European real estate investment manager. Meanwhile, Nuveen is restructuring its real assets platform by ‘launching’ Nuveen Infrastructure and Nuveen Natural Capital and bringing them together with Nuveen Real Estate under one Real Assets group from 1 January 2022. Many other examples predate these considerably.
‘There is a practical aspect,’ notes Sera’s Park. ‘If you have an integrated team that hits both infrastructure and real estate and you are going to a big pension fund investor or other institutional investor, they could put capital to work either from the infrastructure bucket or the real estate bucket. This is a practical reason why a firm would want to be joined at the hip by having real estate and infrastructure together as one team.’
In a sense, having real estate and infrastructure set apart is similar to what could be described as the artificial separation of residential real estate in the US when it was a fixed income product (which led to the 2008 financial crash). ‘A lot of these artificial lines are starting to disappear,’ comments Park.
Single platform
Mike Sales, CEO of Nuveen Real Assets, explains: ‘The whole idea of Nuveen Real Assets is to bring everything under one platform. There is a multitude of clients who are responsible for real assets. Some do have specific real estate and infrastructure investment professionals. But others treat real estate and infrastructure as one bucket. We think being joined up in front of them is the best way to make sure we are getting all the synergies and our go-to-market strategies are the right ones.’
He adds: ‘There are also synergies such as what could be done on the solar side with Nuveen’s huge industrial real estate portfolio or how infrastructure and real estate can join up on the digital side.’
‘We are very focused on what we see as investors’ key priorities so that we speak on topics they want to hear about, whether that be regenerative agriculture, carbon sequestration in timber or single-family rental.’
‘At the top of all this is real assets, where we are thinking about possible headwinds but also macroeconomics and allocations from investors.’
The Nuveen Real Assets boss observes that when it comes to infrastructure, some firms have already scaled while others are looking to grow their existing platform via accretive third-party institutional capital.
Patrizia’s ‘transformational’ deal
Patrizia describes the acquisition of Whitehelm Capital as ‘transformational’ in that it provides it with a leading partner for global real assets.
Increasing AUM is clearly important to the Germany-headquartered company, as evidenced in 2017 when it acquired three real estate managers, adding billions of real estate and taking its overall platform towards today’s €48 bn mark.
The first advantage of buying Whitehelm that Patrizia mentions is that it triples Patrizia’s infrastructure AUM to €5 bn with an aim to reach €15-€20 bn. Whitehelm has €3.9 bn of funds under management via infrastructure equity, debt, and listed equity investments.
It then states that clients will benefit from a much broader diversified infrastructure investment offering, including smart cities and digital infrastructure, decarbonisation and energy transition, water and environmental services, social infrastructure and transport. It has plans to benefit from a new €1 bn infrastructure debt fund.
And it broadens Patrizia’s global footprint, in particular in APAC with more than 60 investment specialists in both Australia and Europe. In a call with PropertyEU, Wels said growing into Asia, expanding the investor base, and playing into demand for infrastructure and themes such as cities, sustainability and digital infrastructure were all major plus points of the transaction.
Patrizia says it is now well positioned to leverage the predicted strong demand for infrastructure over the next 20 years for its clients as investments are expected to rise by 35% from $2.8 trn to over $3.8 trn a year by 2040.
The acquisition will also enhance ‘quality of earnings’ and stability of income to create ‘long-term value for shareholders’ – more than 80% of Whitehelm’s revenues come from recurring management fees with long duration.
Investor interest is certainly at the heart of Nuveen’s recent announcement. Research carried out by the firm suggests over two thirds of investors are planning to increase allocations to infrastructure, natural resources, and other alternatives.
Nuveen combines brands
When Sales took the helm of Real Assets 18 months ago it was clear to him the company could and should bulk up its existing businesses that are under different brands and were harnessing third party institutional capital to different extents. It is also fair to say that having a number of companies with different brand names also had the potential to confuse people.
Westchester Group Investment Management is its agricultural farmland company with $7.7 bn of assets, while GreenWood Resources is its forestry timber group with $1.5 bn of assets, Glennmont its renewables firm with $2 bn of assets, and AGR Partners its private equity arm taking non-controlling equity and debt positions in food and agribusiness companies.
Westchester and GreenWood Resources are being consolidated as Nuveen Natural Capital, while Glennmont and AGR Partners are being combined with Nuveen’s existing private infrastructure business to become Nuveen Infrastructure. Nuveen Real Estate is the third pillar.
All three pillars fall under the banner of Real Assets, which should gain client synergies and offer more land-based solutions across one platform. Commenting on the launch of Nuveen Natural Capital, Sales remarks: ‘Timber and agriculture are two of the most significant ways of reducing carbon footprint. We have seen a real rise in investor interest in those sectors in the last 18 months.’ And things do not stop there. Nuveen is looking to add other strategies to its new platform, he adds.
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Nuveen’s expansion into infrastructure
Nuveen has a private infrastructure investment team but had been actively looking across the world for an infrastructure company to buy. It eventually went for renewable energy manager Glennmont Partners in January this year. Glennmont is one of Europe’s largest such managers with €2 bn-plus of AUM targeting pure clean energy investments in solar power, onshore wind, offshore wind, and biomass. Glennmont is the starting point ‘vertical’ of Nuveen’s newly launched infrastructure business under the real assets banner.
Says Mike Sales, Nuveen’s CEO of Real Assets: ‘It has a great team that Nuveen can wrap its global distribution team around and is out raising capital for. Nuveen can also help it via balance sheet investment in some of the strategies, which is a big reason why (the senior management of) Glennmont wanted to be part of Nuveen.’
Next, Nuveen wants to grow its infrastructure business into the other verticals such as transportation to gain critical mass as its looks to at least treble its infrastructure AUM over the next five years. ‘Most importantly we want best of class capabilities for the verticals of infrastructure,’ he says.
Patrizia’s move into infrastructure
Thomas Wels, co-CEO at Patrizia, says Whitehelm will be able to invest globally, including in the US on top of its Europe and Australian heartland. Renewable energy and data are among the top investment priorities. Synergies could exist using green energy such as solar at its logistics assets. Whitehelm’s investor base is mainly Australian, opening up new capital sources to Patrizia. The infrastructure firm also has European investors.
Whitehelm manages the Smart City Infrastructure Fund backed by Dutch asset manager APG which has €750 mln of equity firepower left to invests in the likes of urban strategies incorporating data centres, solar energy, and social care assets such as pre-schools. A new fund is in the works as well as an APAC fund for which Japanese and Korean investors could be tapped. Patrizia also thinks it can double the size of Whitehelm’s next infrastructure debt fund to around €1 bn.