Investcorp has launched a new private infrastructure business targeting North American investments, with ex-OMERS private markets senior managing director Michael Ryder at the helm.
The launch, announced Wednesday by the $40.4 billion asset management firm, comes amid changing market dynamics that could bode well for the infrastructure asset class. In November 2021, President Joe Biden signed the Infrastructure Investment and Jobs Act into law, effectively earmarking roughly $550 billion in spending on projects.
“Timing-wise, we’ve seen a strong bipartisan support for infrastructure investing [with] the Infrastructure Investment and Jobs Act last year,” Ryder, who also served as head of Americas at OMERS, said via Zoom Tuesday. “That capital really needs to be bolstered and supported by significant private investment.”
Meanwhile, inflation has risen 8.5 percent over the past 12 months, Consumer Price Index data released Tuesday showed. Infrastructure — and real assets in general — tend to outperform in inflationary environments, meaning that the timing could be right for a new platform.
According to Ryder, infrastructure is a “long-term, lower volatility” asset class. It is “cash flowing and generates a yield,” as well. But inflation isn’t the only new market dynamic that Investcorp will have to contend with. With the Federal Reserve raising interest rates, infrastructure investors are also faced with a challenge.
“Clearly interest rates will put pressure on pricing for every asset class,” Ryder said. “The interesting thing to think through is whether that changes the financing mix for deals.”
While Ryder doesn’t expect interest rates to return to the levels of the 1980s, he believes they could moderately increase from where they are today. “These assets can support a significant level of leverage, but one has to maintain a prudent portfolio,” he said. “If interest rates do tick up, then one will need to take that into account when it comes to adding the right [amount] of leverage.”
Through the new business line, Investcorp plans to target companies that focus on the energy supply chain, decarbonizing mobility, digitization, and industrial and social services. In practice, this could mean firms that expand fiber networks across the United States, or public transportation options that could tap into renewables.
Investcorp isn’t the only firm that’s targeting the asset class, however. In early January, Apollo announced that it had raised $2.54 billion for its second dedicated infrastructure fund. In March, KKR revealed that it had raised $17 billion for a global infrastructure fund. “We see a lot of other asset managers who have expanded their suite of products, and we would like to do the same,” Ryder said. “We think that the opportunity is significant.”
According to Ryder, although large investors are targeting infrastructure assets, they are focusing less on middle-market portfolio companies than their European peers. This is the opportunity that Investcorp hopes to take advantage of. “The asset class has grown and matured over the last 12 to 15 years since the Great Financial Crisis,” Ryder said. “What we’ve seen in the United States and [the] North America market is a little different than what we’re seeing in Europe.”
Demand for these investments is high. Investors have become increasingly interested in the asset class, with 87 percent of those surveyed by Preqin in November 2021 saying that they would continue to invest in infrastructure in 2022, as Institutional Investor previously reported. For example, Jeff Wendling, the CEO at the Healthcare of Ontario Pension Plan, told Institutional Investor in March that the fund could grow its infrastructure allocation — which currently sits at 2.5 percent of the portfolio — to 10 percent in the coming years. And with good reason: Infrastructure returned 14.18 percent for HOOPP in 2021.
Investors acknowledge that assets prices are soaring, however — 70 percent of those surveyed by Preqin said that prices were higher than they were 12 months earlier.
Investcorp is open to acquiring a pre-existing infrastructure investment business, or to joining forces with another firm, as it did in 2019 when it established a joint venture in the Gulf Cooperation Council region in partnership with abrdn (then known as Aberdeen Standard Investments). Saudi Arabia’s Public Investment Fund anchored that fund, committing up to 20 percent of the total in June 2021. The Asian Infrastructure Investment Bank also committed $90 million to the fund.
However, if the right business doesn’t come along, Investcorp will build its own from the ground up, raising its own capital to do it. “Our goal is to move quickly here and to rapidly scale,” Ryder said.