How a Collaborative Approach to Investing in Infrastructure Benefits Wespath’s Investors
By Jake Barnett
Managing Director, Sustainable Investment Strategies
One very big number helps explain the opportunity for private investment in infrastructure: $15 trillion. There is projected to be a $15 trillion gap between infrastructure needs around the world and infrastructure funding by 2040, according to the G20’s Global Infrastructure Outlook initiative.1
Infrastructure is a catch-all word for a multitude of things: electricity transmission and distribution facilities, pipelines, water distribution, and wastewater treatment plants are just a few of the infrastructure-related assets that can be invested in, according to J.P. Morgan. Toll roads, bridges, airports, harbors and rail lines are all also infrastructure.
The private infrastructure asset class has a history of steady returns and inflation protection characteristics—and it helps fill the aforementioned need for infrastructure funding in much of the developed world. These traits make it an attractive investment opportunity for Wespath given the risk/return targets of several of Wespath’s funds, in particular the Inflation Protection Fund in both the P Series and the I Series.
Infrastructure assets can help protect against inflation because they often have long-term revenue contracts with built-in escalations linked to inflation. Also, inflation can make the cost of new construction increasingly expensive, which in turn will make existing assets more valuable.
Recently, Wespath sought out a new investment strategy focused on infrastructure. The process led to a great example of cross-departmental collaboration and asset manager due diligence.
The task of finding an infrastructure asset manager to partner with was led by seven Wespath employees: Amy Bulger and Piotr Chwala from the private markets team; Connie Christian, Wespath’s Fixed Income Manager; Sylvia Poniecki and Trent Sparrow of the impact investment team; and myself and Lucas Schoeppner from the sustainable investment team.
To start, we knew we wanted to build out a meaningful and impactful infrastructure portfolio. However, the team collectively decided early on that the more focused “impact investment” infrastructure funds, which tended to invest solely in areas like renewable energy, were a bit too concentrated and high-risk for our needs. Instead, we focused on diversified “open-end” funds, and specifically managers that had a long track record of investing in the infrastructure asset class.
Still, members of the impact and sustainable investment teams were involved from the get-go because everyone recognized that, in addition to traditional financial considerations, there would also be significant sustainable investment factors to think through in this asset class (more on that later!).
After funneling down a list of potential managers, each member of the team spoke to a handful of asset managers and then reported their findings back to the group. These conversations helped narrow the field down to four finalists.
Amy, Piotr and Connie then conducted onsite interviews with the finalists. At the interviews they discussed topics such as fund construction, investment committee processes, competitive advantages, sourcing, value add, examples of deals, cyber security protocols and more. With their decades of combined experience in sourcing private and public market asset managers, Amy, Piotr and Connie were a great group to identify these core competencies—all of which are crucial for assessing whether these managers might be able to deliver strong returns for Wespath’s funds and investors.
Sylvia, Trent, Lucas and I also conducted separate video calls with the finalists. We asked the manager candidates about material risks within the portfolio. For example, energy infrastructure can be an important investment sector in this asset class. This led us to ask questions of each manager on how they were assessing social and environmental risks and opportunities associated with the energy transition in their energy infrastructure investments.
By having our subject-matter experts from different Wespath teams vet the finalists, we were able to get a more complete picture of the asset managers under consideration. And we feel that adds value. For instance, it is our belief at Wespath that asset managers with strong sustainable investment practices closely integrate them into core portfolio management processes—and so it is easiest to look at the whole picture of a manager rather than component parts.
After the interviews, the entire team came together for an afternoon-long discussion of the managers that focused on their respective strengths and risks, key differentiators, performance, if they complemented the risk/return profiles of the funds, and how they aligned with the funds’ key objectives of capital preservation and protecting purchasing power. All team members were encouraged to share their perspectives.
While there were some different opinions and healthy discussion around which managers were strongest in which areas, ultimately, we landed on two managers that we felt demonstrated the best overall fit for Wespath and that complemented each other in terms of strategy and sourcing.
One manager not only had a strong traditional investment process, but also a strong commitment to achieving net-zero emissions that is aligned with Wespath’s own net-zero commitment. This manager explained its commitment in clear terms, grounded in macroeconomic trends.
The second manager we chose focuses on secondary and co-investment opportunities in infrastructure. This is a great complement as it sources investments from partners in need of liquidity solutions that are not traded on the competitive mergers and acquisitions market. Examples include general partner-led continuation vehicles, preferred financing, co-investments alongside best-in-class general partners and management teams.
Moving forward, all members of the team reflected that this was a great process that helped each of us learn and grow in our understanding of the dynamics present in the private infrastructure asset class. We’re excited to continue to leverage this robust collaborative model as we continue to deploy capital and refresh our portfolios in service of the financial goals and values of our participants and institutional investors.
Amy Bulger and Connie Christian contributed to this blog.
1 This estimate includes the funding provided by the U.S. Infrastructure Investment and Jobs Act, which in 2021 committed $1.2 trillion to rebuilding of roads, creating access to high-speed internet for all Americans and more.