Aaron Vale's Guest Post on the Berlin Infrastructure Conference
Berlin Summit: Caffeine Buzz and Sugar High
The annual Berlin infrastructure conference is a spectacle like no other - a global gathering where investors, fund managers, lawyers, bankers, and industry pros converge to take the pulse of the infrastructure investment world. Picture the Berlin Hilton bursting at the seams, with conversations spilling into nearby coffee shops and bars, generating countless millions in economic activity for the city. It’s an event that leaves attendees running on empty, but also brimming with insights. As winter reluctantly gives way to spring, this year's edition proved particularly illuminating against today's complex macroeconomic backdrop.
I am grateful for the chance to participate in the dynamic private infrastructure investment industry. The Berlin conference provides a valuable opportunity to connect with industry peers and engage in numerous insightful conversations. This industry, and its growth, has been a remarkable place to be, and Berlin is where one goes annually to track its pulse. So following the conference what’s on my mind?
GFC Redux? Not Quite, But Close
Let's not sugarcoat it: we're in choppy waters. The recent operating environment for infrastructure investors has been arguably the most challenging since the global financial crisis. Capital raising has been constrained since interest rates began their upward journey in 2023, making capital recycling increasingly difficult.
The evidence is clear - DPI (Distributions to Paid-In capital) has emerged as the new king metric, supplanting IRR and MOIC as the golden standards of a bygone low-rate era. But the DPI machine has become clogged across private markets, severely limiting capital returns to loyal investor pools. This is compounded by the bid-ask spread for infrastructure assets remaining stubbornly wide, hampering M&A markets that once functioned with relative fluidity.
Sound familiar? It's GFC-esque, but with a twist. Back then, infrastructure was a quaint ~$100 billion niche with a handful of players. Today, it's a $1.5+ trillion juggernaut with thousands of strategies duking it out. Growth like that breeds competition—and complexity.
The Barbell Effect: Go Big or Go Niche
Infrastructure investing is no longer a game for the middle. A clear barbell effect has emerged.
On one end, mega-firms with their abundant resources, global footprints, and diversified strategies are capturing disproportionate attention and capital. These brand-name players offer institutional investors the comfort of scale and reputation during uncertain times.
On the other side, nimble independent specialists carving out strategy / sector / geographic niches are emerging. They appeal to investors with differentiated strategies, cleaner alignment, and demonstrated track records either with their current firms or as successful spin-outs from previous platforms.
The middle ground? It's treacherous territory. These groups face competitive pressure from both ends while often grappling with succession challenges. As one conference attendee starkly observed, "There are firms at this conference that don't know they've already invested their last dollar." Brutal but perhaps spot on.
For institutional investors, this barbell dynamic forces tough choices between mega-fund partners and niche independent specialists, each bringing distinct advantages and limitations. Expect to see more secondary activity with LPs selling funds that are no longer strategic to their portfolios, and GP-led continuations for prime assets increasing as those allow fund managers to keep the keys for a little longer on their marquee investments.
Tariffs: The Uninvited Guest
Perhaps no topic generated more divergent reactions than the looming spectre of tariffs and trade nationalism. The divide between American and non-American perspectives was striking. American investors seemed surprisingly unfazed, either numbed by the rhetoric or distracted by other concerns. Their international counterparts, including Canadians, Europeans, Australians, and others globally, are increasingly factoring tariffs into their strategic calculations.
Only a year ago, the Inflation Reduction Act had everyone eyeing U.S. energy transition plays. Now, trade policies may be pushing focus elsewhere. Germany's recently announced €500 billion infrastructure incentive scheme is turning heads, and Canada's push to freer interprovincial trade and energy exports might open up new opportunities. Make no mistake, tariffs are creating new pressures on asset management and underwriting teams as macroeconomic uncertainties impact business plans.
Concerning me was the response from a prominent fund founder about how boards are incorporating tariffs into business plans. His answer was sobering: ‘CEOs are not doing new capital investment in this environment.’ This reluctance could presage negative economic figures and perhaps more market turbulence in the coming months. My concern is that the global system is so complex, connected, and over-levered, that if one thing breaks, contagion might ensue. If that type of situation were to come to pass, we could be staring at more extreme market drawdowns. There might very well be a shorter-term ‘sugar-high’ moment when policy shifts and market stimuli offer short-term gains, but the looming prospect of long-term adjustments should keep everyone wary. Buckle up.
The Maple Eight: A Model at a Crossroads?
No discussion in Berlin could overlook the subtle, yet potent, influence of Canadian infrastructure investors, headlined by the Maple Eight. The Maple Eight pension plans have long been the envy of the institutional investment world. Toronto is dubbed the ‘Silicon Valley of pensions’, and for good reason: the cluster of pension plans and other institutional investors in Toronto provides a sophisticated ecosystem when it comes to allocating to alternatives.
Yet questions about the Canadian model seem to be emerging with greater frequency. AIMCo's recent strategy and board overhaul signals a shift. Furthermore, a couple people noted that some pensions Direct portfolios have underperformed vs. what could have been provided with a fund and / co-investment implementation approach. Less officially, there's a sense of accelerating change and turnover in teams and investment approaches across the Canadian pension landscape.
Is the Direct investment approach hitting its limits? The costs of maintaining global teams are under the microscope, and this challenging environment might be the first real stress test for the Canadian model that has been so widely touted. For Canadian pension execs, it's time to ask: Is Direct still the gold standard, or is adaptation overdue?
The Road Ahead: Adapt or Bust
While the conference might have left many of us running on empty, mentally and physically, it also reinforced one thing: infrastructure is an asset class that keeps on giving. Despite many challenges, infrastructure remains in many ways "the greatest asset class ever created." Essential services, non-correlated cash flows, inflation protection, and long duration continue to make compelling investment cases. As we enter a new phase of infrastructure investment, the asset class will undoubtedly grow. But the next decade will differ markedly from the last. Expect wider returns dispersion, stretched sector definitions (digital, anyone?), and trickier performance hurdles. As Buffett says, "When the tide goes out, you see who's swimming naked." The adaptable will prosper; the rigid will be left wondering what went wrong.
What It All Means
For infrastructure investors and pension executives, Berlin could be a wake-up call. The landscape's shifting with changing rates, tariffs, and competition rewriting the playbook. My advice: Diversify your bets, leaning on mega firms for stability and niche independent players for alpha. Scrutinize your implementation models - direct, funds, co-investments, secondaries, debt, and even publicly traded infrastructure can all be attractive implementation tools.
In a world where capital is increasingly mobile and discerning, the winners will balance caution with opportunism, and remember that even in a barbell world, the middle isn't always empty. Sometimes, it's just regrouping. Heraclitus nailed it: "Change is the only constant." In infrastructure investing, that change is now.
The author is a veteran infrastructure investor who has invested in, operated, and owned infrastructure assets across six continents, from transport to energy, social to digital infrastructure. He has been both an LP and GP, having invested billions in funds and co-investments, and raised global infrastructure funds and SMAs.
I thank Aaron Vale for sharing his wise insights with me.
Aaron really understands the asset class well having worked at top GPs and LPs and he really understands important trends going on right now.
Earlier today, we chatted on the phone (he's based in Toronto) to discuss his comments above and we went over a few things.
First, he explained to me how the GFC created incredible opportunities for large pension funds to invest directly as there were plenty of forced sellers back then.
But the environment is very different right now and the advent of mega funds, intense competition means large LPs who have gone direct need to rethink their strategy to invest in large funds and co-invest alongside them on large deals (similar to the private equity model).
Think about it, now you have KKR, BlackStone, BlackRock, Carlyle and other large mega funds all competing in a space where it's becoming increasing more difficult to generate alpha.
On the other side of the spectrum, new emerging players with strategy/ sector/ geographic niches are providing great returns but these strategies aren't particularly scalable, at least not to the level large pension funds are looking for.
Still, as Aaron explained to me, if you create the right structure (segregated account) and have the right team looking into it, there's definitely ways to scale these strategies to enjoy excellent incremental returns on large core infrastructure investments.
We also discussed how renewable energy projects have been all the craze but there too, huge dispersion of returns from developers selling off these assets at the right time, and those who buy & hold them (like 8-9% for not and hold vs 15-18% annualized for developers who sell assets at right time).
As far as risks, there's this perception that infrastructure is a perfect asset class with long duration assets that are indexed to inflation and there are no risks but as Aaron explained, there are serious regulatory risks and if inflation starts soaring, regulators will cap fares (there are ways around this but it's not obvious).
I remember when I helped Bruno Guilmette (now CFO at Boralex) set up Infrastructure as an asset class at PSP after I helped Derek Murphy set up Private Equity as an asset class, the there were a few risks in infrastructure we noted: 1) highly illiquid (that's part of the game), 2) currency risk and 3) regulatory risk.
It's regulatory risk that has sunk a few infrastructure investments at Canada's Maple Eight and without going into too much detail, there have been some high profile cases.
I'm happy to see a nice secondary market is being built in this asset class, it will help liquidity and aid LPs to manage their portfolio better (just like in private equity) but it's clear to me that the old model investing (purely) directly in infrastructure is coming to an end.
As Aaron notes above:
Yet questions about the Canadian model seem to be emerging with greater frequency. AIMCo's recent strategy and board overhaul signals a shift. Furthermore, a couple people noted that some pensions Direct portfolios have underperformed vs. what could have been provided with a fund and / co-investment implementation approach. Less officially, there's a sense of accelerating change and turnover in teams and investment approaches across the Canadian pension landscape.
Is the Direct investment approach hitting its limits? The costs of maintaining global teams are under the microscope, and this challenging environment might be the first real stress test for the Canadian model that has been so widely touted. For Canadian pension execs, it's time to ask: Is Direct still the gold standard, or is adaptation overdue?
Judging with what is going on at OTPP Private Equity, more fund and co-investments, I wouldn't be surprised if the same approach will be adopted in Infrastructure in the years ahead (not just at OTPP Infrastructure but across the Infrastructure portfolios of the Maple Eight).
And don't forget what Neil Cunningham, PSP's former CEO shared with me late last year:
Neil explained how platforms mean different things for private market asset classes:
- For real estate, you have joint ventures 50/50 splits with funds developing and acquiring properties
- In private equity, platforms are built on strategic relationships with PE fund to gain co-investments and reduce fee drag. The same goes in private credit.
- In infrastructure, you have operating companies owned by pension funds that buy toll roads, airports, ports, etc.
Neil told me given the reputation risks of owning platform companies in infrastructure that are sole operators of an asset, it might make sense for several large pension funds to invest together in the future and compete with the ever growing mega billion private equity infrastructure funds.
All this to say increased competition in private markets is necessarily impacting the way Maple Eight funds approach all their private market asset classes.
Food for thought.
Below, an episode of The Pulse by GRESB, brought a conversation recorded at the Infrastructure Investor Network’s Global Summit, which took place in March in Berlin, Germany last year.
Discussions centered around ESG data and the evolving focus on sustainability in the infrastructure sector. Attendees emphasized the maturity and progress in ESG reporting, the challenges of data collection, the need for standardized carbon accounting, and the importance of tailored sustainability approaches to meet both financial and societal goals.
Also, the optimism in Berlin this year is palpable amid a lawmaker vote on a 500 billion euro spending package to boost German defense and infrastructure, says KKR's Raj Agrawal. He sees more opportunities in the country and the wider bloc as Europe looks to rearm amid the threat from Moscow.
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