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Investing in global infrastructure presents potential opportunities and can help support a diversified investment portfolio for income-oriented investors. With increasing urbanization in emerging markets, an energy transition with strong government support, and a digital revolution driven by AI, the time is now. Now it’s infrastructure investment. Get insight from Josh Duitz, Head of Abrdn Global Income.
Can you tell me how you define infrastructure assets?
Josh Duitz: Infrastructure assets refer to physical structures and facilities that are essential for society to function. These assets typically serve as the backbone of economic activity and public services.
What are the benefits of investing in infrastructure?
Josh Duitz: We really like infrastructure as an asset class and it brings diversity to your portfolio. Additionally, it exhibits several characteristics not found in other portfolios. Looking back, even during the global financial crisis, Even during the global financial crisis, if you look at globally listed infrastructure companies, these companies increased their EBITDA even during the global financial crisis. These companies are defensive companies. No matter what happens in the economy, people will spend their utility bills, talk on their cell phones, drive on the roads, and use the trains. So we really like the defense of infrastructure companies.
This protection provides a stable and predictable cash flow. These cash flows allow us to pay dividends and increase dividends. As mentioned earlier, the demand for these services is endless. No matter what happens in the economy, people are going to pay for utilities. Another part of the infrastructure that we particularly like is the anti-inflation part of the infrastructure. Many of the assets we invest in have tolls and fees that increase with inflation. For example, one of the companies we invest in in Brazil increases road tolls and tolls every year in line with inflation. A very good anti-inflation component. Some cell towers have features similar to those seen in other industries. That’s a very important part. Inflation protection, defense capabilities, and inelastic demand for services.
Therefore, we believe that infrastructure is a great asset class to invest in. Furthermore, many of the assets increase with GDP or GDP multipliers. As we talked about roads and planes and air travel, GDP grows at a multiple of GDP. Again, we have a defense that has the ability to grow with GDP.
How is ASGI organized around infrastructure?
Josh Duitz: We categorize infrastructure into four different sectors. The first is transportation, which includes roads, airports, ports, and railways around the world. For example, we love roads. Every time an additional driver travels on that road, it costs nothing extra for that driver to travel on that road, and all of that revenue goes straight back into the bottom line, so you get a big operational benefit. You can Generally, traffic increases with GDP in emerging markets. As consumers move up the wealth curve and can afford their first car, GDP grows by about 1.5 times.
Another area we really like is airports pre-pandemic, but now that pandemic air traffic has increased by about 1.5 times global GDP over the past 20 years, that trend has reversed. That’s what I think. Again, when you enter an airport today, in many cases you are essentially entering a shopping mall. Airports are aware of their detained customers and are trying to monetize them at the airport. So we also really like the airport sector. Another area we’re investing in is telecommunications, and what we like there is cell phone towers. These are large towers that can be seen everywhere and basically allow mobile phone networks to operate.
So, what do these cell towers actually do and how do they work? Again, these cell towers have significant operational influence. Looking back, I hate getting old, but when I started my career, most people had landlines. It has gradually appeared on mobile phones. It’s just a flip phone. The next generation is just the smartphone, and by smartphone I mean BlackBerry, and all we do is communicate via email on her BlackBerry. Then the iPhone came out, and the smartphone revolution began in earnest. I do all of this, including recording it on my iPad. It’s amazing how much technology has changed over the years. We believe that the next technology change will be from 4G to 5G. And these cell towers are the critical infrastructure that will enable the transition from 4G to 5G.
We are in the very early stages of 5G, although we will need more towers and higher density towers to make it work. We will see remote surgery and self-driving cars, just as happened in the age of smartphones. More cell towers will be needed around the world. Businesses typically pay a fixed fee that increases with inflation for cell towers, making them a great infrastructure asset to invest in. The third sector we invest in is the utilities sector, and we have generally and historically been significantly underweight utilities. Due to the energy transition, we have increased our exposure over time. As we saw in the United States, we signed an anti-inflation law that had nothing to do with controlling inflation. In fact, this was the largest climate action in the United States ever, although inflation would probably rise. Similar legislation can be seen in Europe and elsewhere.
Another great stimulus. We are going to spend a lot of money on that energy transition over the coming decades, so we want to be a part of it and take advantage of this great investment opportunity. And the fourth sector where we are significantly underweight relative to benchmarks and peers is energy. We only invest in midstream energy, and those are the pipelines that are transporting energy. It is similar to a toll road with a fixed toll. So we want to be that toll road collector. These are the four areas where we invest in infrastructure. We founded our first fund more than 15 years ago by looking at where infrastructure is spent, what happens by region and sector, and we use that as a framework for where we invest. Masu.
Now, as we’ve seen with the energy transition from 4G to 5G and investments in cell towers, our thinking evolves over time. One of the trends we’ve noticed is massive investment in private infrastructure by institutional investors. Over the past decade, investment in both public and private infrastructure has grown at 17% per year to more than $1 trillion. However, individual investors have not had the opportunity to invest in private infrastructure alongside institutional investors. So when he launched ASGI three-and-a-half years ago, he saw it as a unique opportunity to offer retail investors access to private infrastructure investments. ASGI is allowed to invest up to 25% in private infrastructure, which we believe will be a huge opportunity going forward.
ASGI is the Tern Foundation. What does this mean for investors?
Josh Duitz: ASGI is a term fund, which is unique in the closed-end fund space. Being a term fund, we invest in very liquid companies, so it doesn’t affect public investments at all, but it does affect investments on the private side. Typically, our private investments last for three to five years, so as we approach the end of that period, we make fewer and fewer private investments for the purpose of ending that period and returning assets to our shareholders. .
