Talking Heads – Long-term trends underpin European private equity infrastructure

This is an edited audio transcript of the Talking Heads episode with Rodolphe Brumm

Andrew Craig: Hello and welcome to this week’s BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis on the topics that really matter to investors. In this episode we’ll be discussing private equity infrastructure. I’m Andy Craig, Co-head of the Investment Insight Centre, and I’m joined today by Rodolphe Brumm, who is Head of the Investment Team for Private Equity Infrastructure. Welcome and thank you for joining us today.

Rodolphe Brumm: Thank you very much for inviting me. I’m very happy to be here.

AC: To begin with, it would be good if you could talk to us about the current environment. What is the attractiveness of private equity infrastructure as a distinct asset class?

RB: Yes, in the current environment, we can see there’s increased volatility coming from geopolitical and economic uncertainty. The infrastructure asset class offers defensive characteristics and, more importantly, a combination of downside protection. The infrastructure asset class has really been built around offering essential services [with] monopolistic characteristics. They provide high visibility on cash flows and protection against inflation for the stakeholders. So, in the context of uncertainty, the characteristics of infrastructure as defensive are clearly a big advantage.

But infrastructure also offers exposure to upside. Some of the macro trends that we see around decarbonisation and digital transition are really long cycle. Because of the growth associated with them, it offers a high potential for value creation for investors in infrastructure. These characteristics [are] difficult to be disrupted.

AC: It has a protective moat around it. It’s not going to disappear overnight as a corporation could do if there were to be a technological change. The other big factor at the moment is geopolitical change. We’ve seen events which may well fundamentally change the environment that investors operate in. Do you expect the intention to significantly increase defence spending to impact the long-term support we’ve seen for the low carbon and digital transformation?

RB: The short answer is no, we don’t expect that. This said, we cannot deny that the increase in defence spending is going to come from somewhere. The reason why we don’t see it as disrupting infrastructure investment is because the macro trends in infrastructure are significant. If I take digital transition, whether it’s investment in fibre or lately investment in datacentres, initially, there was a number of schemes that helped put digitalisation across countries and it was government supported. Today, the digital transformation is private sponsor led and led by economics. People invest in AI and datacentres because they see a business potential. This is not going to be disrupted.

At the same time, there are sectors which are require subsidies. There’s green mobility, EV cars, hydrogen. All these things require regulatory support and to some extent financial support from government. And despite the increased focus on the ‘Fit for 55’ commitments, if there is a diversion of resources, subsidies, it’s possible that it will impact some of these sectors.

AC: Let’s pause for a moment. I’m going to explain to our listeners, the ‘Fit for 55’ package is a set of proposals and legislative amendments by the European Union aimed at reducing greenhouse gas emissions by 55% by 2030. It’s all part of the EU strategy for the European Green Deal.

RB: Indeed. That’s the medium-term and long-term agenda which is driving a lot of the policies. And to date, again, this agenda is not impacted. The commitment has remained strong.

AC: Let’s talk a little bit more about private equity infrastructure as an asset class. Within the asset class [there] are other criteria and trends that investors should be aware of or be looking at today.

RB: Yes, the macro trends supporting infrastructure apply across the sub-segment. We believe that investors can look at premium returns when looking at the mid-cap segment. Among the macro trends, the low carbon transition is the strongest. It’s often driven by smaller companies creating new green infrastructure. Of course, you have the large utilities and the big oil & gas companies, which are also investing in renewable energies. Most of these investment are made by smaller entrepreneurial, agile companies which are creating the most value. If you invest in the mid-cap segment, you are supporting these companies and they are the ones which offer significant upside for investors.

AC: Within the asset class, what are the specific sectors or geographic regions where you see particularly attractive opportunities?

RB: Renewables and the associated investment in energy storage. For most countries, this will be the first source that people will go to when they need energy. You have things like biogas, so biomethane, which is a smaller segment, but is driven mostly by decarbonisation, and also geopolitical reasons, especially the need to have sovereignty on the gas front. Europe is very far from that.

The last one is energy efficiencies. On top of increasing the volumes of electricity produced and reducing its cost, there’s the opportunity to reduce consumption or optimise it.

In terms of geography, in Europe, it varies depending on where you look. There are great opportunities in battery storage. There are markets where power prices can be cheap at moments of the day, such as Spain where because of the abundance of solar power, its energy price can be negative at times, and think of the Nordics. Because of the abundance of wind and hydropower, you can have negative prices. This offers opportunities to invest in storage as it’s clearly needed. The Nordics are more advanced in things like marine mobility and even the circular economy. So, the Nordics do offer some opportunity. Overall, there’s a quite a healthy number of opportunities to invest in the transition in Europe.

AC: That sounds like a very diverse opportunity set. You’ve talked about the fact that the mid-cap companies are often going to be leading the transformation in the various sectors within Europe. Can you talk to us about how you originate opportunities for your strategy. How can you be sure that you’re going to pick up on the interesting opportunities?

RB: I would say there’s a spectrum of sources for origination. We have strong personal networks in the space enabling us to originate a large number of transactions. But obviously we belong to BNP Paribas, which is one of the largest banks in Europe. That provides us with a lot of opportunity. The group is involved in terms of advising companies looking to raise money for the transition energy.

It’s involved in financing a lot of these companies, whether big or small. It’s perceived as a major entity for sponsoring decarbonisation. When we see people in the market, various stakeholders from governments to investors to operating companies, there’s clearly an advantage of being BNP Paribas. We benefit from the brand and the reputation of the group.

AC: Rodolph, you’ve talked about the attractiveness of private equity infrastructure in terms of the fact that it is relatively protected, which means that it can’t be disrupted or done away with overnight. It’s a long-term investment which provides visibility on cash flows, which is attractive to institutional investors. You’ve talked about the opportunities today with what’s going on in Europe, the concerted move towards strengthening defence, but also the concerted move towards a digital transformation,  towards green policies at the level of the European Union. And you’ve talked about the geographic opportunities across the continent. And finally, we’ve talked about the strength of BNP Paribas in terms of enabling you to access these opportunities. Thank you very much for joining me today.

RB: Thank you for having me.

AC: That’s it for this week’s episode of Talking Heads. If you’d like to learn more about our investment insights, please reach out to your BNP Paribas Asset Management contact or check out Viewpoint, our website for investment insights at viewpoint.bnpparibashyphenam.com. You’ve been listening to the BNP Paribas Asset Management Talking Heads podcast with me, Andy Craig, and Rodolphe Brumm, Head of the Investment Team for Private Equity Infrastructure. Please do join us again next week. Until then, take care.