Understanding Infrastructure's Role in Alternative Investments with Nick Moller from JP Morgan | Episode 002 | 08-14-24

Ever wondered how private infrastructure investments can offer stability and steady cash flows amidst volatile markets? Join us as we sit down with Nick Moller from JP Morgan to uncover the intricacies of core infrastructure. You'll gain insights into how regulated utilities, natural monopolies, and long-term contracted investments create a reliable backbone for your portfolio. Nick debunks common myths about infrastructure volatility and commodity sensitivity, revealing the strategic importance of these core assets, especially in an era of aging and outdated infrastructure.

Our conversation takes a global turn, examining the US market’s unique dynamics, including the pivotal role of municipal bonds and the benefits of a diversified approach. We discuss the implications of political changes, regulatory risks, and how the energy transition, bolstered by the Inflation Reduction Act, is reshaping investment landscapes. Learn how private capital is essential for replacing and modernizing infrastructure, and how private investors can align their long-term goals with these critical projects.

Nick defines infrastructure subsectors like digital infrastructure, rail, storage, and renewables, understanding their growth potential and inherent challenges. Each has complexities of expanding the power grid amid rising demands from AI-driven technologies and renewable sources.

Nick and Matt also discuss the impact of ESG factors on infrastructure investments, emphasizing their financial materiality and the role of governance and regulatory plays.

Welcome to the Alternate View. This is Matt Andrulot from Verdence Capital Advisors. Today we're going to be speaking a little bit about infrastructure, and our guest today is Nick Moeller from JP Morgan. So, nick, thank you Welcome. Why don't we take a couple minutes and, if you don't mind, introducing yourself and what you do at JP Morgan with regards to infrastructure?

Perfect. Thank you very much for having me here and, as you mentioned, I'm part of the infrastructure investments group at JP Morgan, which really focuses on private infrastructure investing. I spend most of my time speaking with existing and prospective investors for the asset class. I've been with the firm 18 years, originally an investment banker in infrastructure, now on the asset management side and, as you can tell, probably a little bit of an accent from New Zealand originally, but I've been in the United States since 2007.

Fantastic. Well, I'm really excited to talk about private infrastructure today. It's a very interesting asset class to me. I think the folks that will be listening to this as well find it very compelling, given our market environment as well find it very compelling, given our market environment as well as the world in general. So, if we can talk a little bit about private versus public and then what infrastructure is, as a asset class, in your mind, yeah.

So maybe let me stop with a sort of second part of that question. When we think about defining infrastructure, when we use the terminology core, core plus, et cetera. So from a core perspective, we're mostly talking regulated utilities, natural monopolies with commodity risk past to customers, or long-term contracted investments. The reason we're emphasizing that is they tend to be essential services, steady cash flows no matter what Chairman Powell said yesterday no matter the market environment. Heat, water and electricity tends to really be in demand. So it's a little cheesy, but I sort of summarize it as the objective being DIY, diversification, inflation protection and yield. Now, when we then extend that to public versus private, it's a common question, very reasonable question.

What I think people don't always appreciate is it's not necessarily the same assets, one in a public and one in a private format. Generally speaking, what I see is public equity investors are looking for growth and upside keeping up with whatever we're calling the FAANG stocks these days. Let's just pick on NVIDIA. The reality is, though, core infrastructure doesn't have that same growth profile, so what you often find is public infrastructure setting aside public market beta often has more of a core plus development or some other orientation. So our view would be that there's a pretty big difference between public and private in terms of their exposures. Now, obviously there's a liquidity difference too, but if the goal is DIY, in our view that's private. If one needs liquidity, obviously public markets can be very attractive as well.

No, that's great. So from I mean, a lot of perception around infrastructure is that has a huge commodity bent to it and that it can move necessarily a little bit more volatile, potentially based on what commodities necessarily do. Do you find that to be a misconception, especially in the private markets and in the asset classes? Your DIY version of it, what do you think about that? Is that something that people are just putting that nomenclature on and figuring out like, hey, commodities infrastructure, it's going to be highly volatile at times. What do you guys think about that?

Yeah, and it is. Maybe misconception is the wrong word, but it really gets back to core. Core plus value add. There are absolutely parts of the asset class that are physically infrastructure but have a much more commodity sensitive profile. For me a lot of this gets back to the MLP boom. People remember how that played out, so they're thinking mindset well, I had a lot of commodity exposure there. That's not incorrect. But when we would be defining core, as I set out, regulated utilities, for example, if one looks at your power or water bill, you see two charges transmission and usage. How a utility gets paid is getting it to your house, not necessarily how much the commodity costs and how much you used. And so it's not that it's not infrastructure, but the way I'm defining it in terms of that DIY objective. We would say material commodity risk should not be part of that opportunity set. Now if someone was saying higher risk, private equity or style infrastructure, absolutely, but it's a little bit of a different sort of ballgame.

Essentially, so why are some of these infrastructure investments needing private capital versus what's called government or supplemented capital? Right, these are things that every human being technically necessarily needs a road, electricity, some sort of fuel. There's a lot of. You can give more examples, obviously, than I can, but you know the government. You would think that your tax dollars go into this at some point in time and everyone perceives that to be why private dollars or private investors being involved in that asset class.

Yeah, and it's a really good question. So I actually started my career in the medium bond group at JP Morgan. So obviously municipal bonds can and do fund an important part of infrastructure, but at some point the scale of it is such that should it all be on the public balance sheet? I guess that's an open question. People would have views on that, but I think broadly what we'd be seeing is the sheer amount of capital that needs to go into. Let's just start with replacing much of the infrastructure that was built post World War II. We can get into other aspects of energy transition or otherwise where more capital is needed. Just the sheer scale is significant.

And the other piece I would say is really goes back to what I mentioned before the public versus private. I think what we see is public investors have a very specific goal and objective when they invest in public equities typically, whereas on the private side we tend to be a little bit more cashflow and, dare I say it, long-term orientated. So I do think there's also a, not just a how much do we need to invest, but what type of investors have the goals and objectives that match the nature of these assets? Because you see a lot of press around oh, utilities are boring, they're interest rate sensitive, et cetera. We would purely just focus on the long-term cashflow, the monopolistic profile, et cetera. So I think that definitely plays into it as well, yep.

As we look at the infrastructure universe. I look at it a little bit differently, domestically, internationally. You guys invest globally, right Across the world here. What are some of the differences between us here domestically and the United States investing in infrastructure from a private perspective, relative? Let's just call it the rest of the, let's call it the developed markets, because I am going to ask you about emerging markets, but talk a little bit about that, where you guys see the differences between that positives, negatives, benefits, obstacles, those types of things.

Yeah, and maybe let me start with why global? Because I do think it's fair to say especially, people often come to this asset class with a hey, I do real estate, but I do it only domestically. Why is infrastructure, generally speaking, global? And it's actually, in my view it's for the point I already mentioned, that people forget that the municipal bond market funds so much of infrastructure in the United States that US infrastructure on the private side might often be very sectorally or otherwise focused, Whereas you get outside the United States they don't necessarily have that municipal bond market equivalent. So you get a lot more diversity. So I do think the other point here is and apologies if I'm jumping into questions you're going to get later but when we think about risks, the key risks in the way I define core would be operational and regulatory, slash, political.

So one of the best ways to mitigate risk in infrastructure. It doesn't tend to be the classic macro risks we talk about in other asset classes, it's very idiosyncratic local factors. That also means there's even more benefit perhaps to being global. So that's sort of why we end up there, I would argue. At least in developed market OECD countries it's not that different than the US, and so maybe one way I'd frame it is for infrastructure. In the US, we love to talk about what's going on at the federal level. The reality is it's a state and local situation, so we have 50 quote unquote countries, as it is for infrastructure anyway. So what we're really thinking about is strong rule of law, regulatory consistency, et cetera. Fundamentally, it's not that different other than FX exposures and having to think through what that might mean.

Yeah, so currency can play a part in Wherever geography that you're necessarily in or where you're participating in. So you brought it up. I didn't uh, which was geopolitical components to. You know what is the impact of geopolitical changes? I mean, we, we have a geopolitical change kind of going on here in the United States right now, but just globally. I mean, how challenging is that from an infrastructure perspective if you have governments turning over and making different changes, and now it's even more so at the state level right, you just mentioned 50 countries basically in the United States having to deal with different changes there, and then the federal level on top of it, and then obviously, you know, globally we still have this, the same kind of changes. How, how, how do you handle those challenges as an infrastructure investor?

Yeah, absolutely, and obviously, especially with a pending election. It's a common question right now. So I sort of alluded to it. But let me first be very upfront and say look, political or regulatory risk is, alongside operational risk, the major risk of the asset class. But I like to remind everyone well, remember, you're probably a contractual or regulatory monopoly. It's not like someone could show up tomorrow, compete away your business very easily. So in return for being more monopolistic, you're going to be more regulated. So the flip side of the coin is well, we should probably embrace that in a way.

I think it's obviously very scary from a headline perspective, but I think less than over time would show that, at least in developed markets with strong rule of law, even with a change of administration, the reality is consumers need heat, water and electricity. It is in no one's best interests to have that go awry. So I think what this often comes down to and we can talk Inflation Reduction Act or otherwise in a moment but often I think this is separated between operating assets and development of new assets. Operating assets within reason and there's always exceptions but in a broadly diversified portfolio, don't tend to be massively impacted by change in administrations because they're serving customers today, how much may or may not get developed in a certain space in the future.

Now that's a bit of a different question. But to my definition earlier, development isn't necessarily core. So there's a little bit of a let's bifurcate how we think about this dynamic. But I'll sort of say again to someone who says to me I want to do US only infrastructure, I certainly get that from a currency standpoint, but there is more concentration of exposure because by definition you're dealing with less regulators. So that's why you see so many strategies being global and this asset class is quite truly the best way to mitigate risk is often to be diversified.

Yep, so again you, you brought this one up.

But energy transition and inflation reduction act, obviously big topics, headline topics, and it has been for quite a period of time, but we also have this geopolitical thing going on at the moment, called an election, so you know, and that could potentially change a lot.

And I guess, as it relates to the development of new assets or the transition of what's called carbon based fuels to something else a little bit different, how do you guys see, and you know, plan for those type of things from an investment perspective, because there was a huge push for electrification and things of that nature here in the United States, electrification and things of that nature here in the United States, so, and I know it's been going on globally, but I mean we see it more here and at domestic level now. So I'm just curious from your perspective, as you guys are looking out and obviously long-term investors, right, you've mentioned that a number of different times, which is great, but you're building big assets too, right? Like, and these are big investments with big dollars that are associated to that how do you look out far enough when you have changes like this coming along?

Yeah, it's definitely an interesting one. Let me first say it sounds obvious, but I think important to say is that every jurisdiction determines what's appropriate for the energy mix, their profile et cetera. So we operate in multiple states and multiple jurisdictions. We're not the ones. By definition, infrastructure investors are working with their regulators. So it's not necessarily that infrastructure investors are saying we will do this or we will do that. It's, by definition, a dialogue locally. But to your broader point, so what could these shifts mean? And I think the Inflation Reduction Act is the best example is that it gets a lot of talk. I get a lot of questions about it, but the reality is, by definition, it's focused on new investment or development. That's not necessarily a bad thing, but from a core operating investor's perspective, that's not necessarily part of the opportunity set.

The way I sort of think about it is the more that maybe gets built long-term increases the supply of things to maybe buy in the future. So that's sort of the argument for well, there's a lot of interest in the asset class. Is there enough to buy? I can see the yes. You can see the whether it's inflation reduction act or otherwise the sheer need to even revest in old infrastructure that needs to be rebuilt, but I don't think it will massively change the core opportunity set should. Depending on the administration, it goes one way or the other. What I would say, though, is for investors who are in the asset class, who are more focused on those development opportunities, absolutely that could be important, but I just think it's really key to bifurcate in people's minds Again.

I'll say it again it's memorable that DIY objective is not at that end of the spectrum, but I would overall say and I think this is intuitive no matter the administration, no matter how we've framed it, investing or supportive of investing in infrastructure has been there across administrations. We've had infrastructure week, infrastructure bills. We don't see a lack of support for the investment in general. It's just what flavor might that take? Depends on jurisdiction.

Yeah, and I would say I guess that goes to kind of environment right, like when's the best time for infrastructure investing, right, like when's the best time for infrastructure investing, right, and the contrary to that, like when's the worst time for us as investors to make additional capital commitments to an infrastructure investment? We come into different periods and I know it's almost secular versus cyclical to my perspective. But there are headwinds and tailwinds to all of this and I know the political system loves to use infrastructure as an economic booster for the US economy. So I'm curious, kind of like, as you guys see this, where do you see those tailwinds and headwinds come from? Is it you know what type of market or economic kind of conditions that we're currently in or potentially would be in that would be helpful to us?

Yeah, no, it's an interesting one because I'll sort of go back to again. If we're talking about the DIY type assets, I sort of tongue in cheek joke that tactical and infrastructure is the next five years, not the next five weeks. It sounds cheesy but it is quite literally true. So I do think, by design, infrastructure is much closer to being a sort of a secular trend than cyclical. Now, to be clear, that works both ways. And if the equity markets are up, infrastructure is probably not seeing the same upside, and the flip side is true. So that is the diversification at work.

So, because a lot of the factors that drive these assets are local and idiosyncratic, not macro factors, it is kind of hard to pick on a. Should I get in or out now of the asset class in general? Now, that being said, at a subsector level we already talked a little bit about energy transition or different subsectors there can be dynamics that shift across sectors and geographies. But for sort of an asset class level we would say and perhaps not surprising there's always a place for infrastructure in the portfolio. But it really does get back to the what role is it serving, if there's one thing that is sort of more of a cross-sectional theme. On balance, most infrastructure assets are inflation sensitive, so a higher, for longer, inflationary environment would, in principle, be expected to be positive, and the flip side is true. The only caveat I'll add to that is because, obviously, inflation has been a hot topic. I was very careful to emphasize long-term inflation dynamic, not necessarily short-term, and so that's the one macro factor we like to talk about.

Everything else tends to be a bit more local and is so idiosyncratic. And that's again back to the well, I'm not placing my bets too much on any one sector Now. Maybe we'll talk about it. There are some people who have been very focused on certain subsectors we talked. There's been MLPs in the past. I know data and digital is very much in vogue right now, so you absolutely can take a more concentrated sector at. I would say generally that's where there's more capital deployment, formation opportunity. But there's always that bit of buyer beware of. Is everyone else doing it at the same time, so there's certainly a trade-off.

So you brought up a couple of the subsectors with inside of infrastructure, and I know there's an enormous list. People don't really. People think energy most of the time. Right, when you say infrastructure, they think roads or different toll roads and things like that. But there's a lot that goes on with inside of infrastructure across the globe from an investable level. What are some of those subsectors that you guys believe will be opportunities in the long term? Or maybe you know you mentioned lots of people looking at the same things at the same time is always not the greatest situations, but what are some of those that would be like? You know, we're a little bit more cautious here than we think that is needed in the future with this asset class or sub-asset class.

Yeah. So I would say is from a broad level, when we're thinking about the core side and it sounds generic but it's pretty true regulated investments of all kinds. So that's heat, water, gas, electric, where the framework of being a monopoly is always of interest to us as a core investor, and then it's various flavors of contracted investments. That could be storage, rail, leasing, renewables. I think ultimately, what we get back to is does it have a contractual regulatory profile and does it have an investment need, either renewal or replacement or adding more? That's really the lens that we're looking through. I think and I sort of tipped my hat on this there's really two places where maybe we're a little bit more cautious from our perspective, and it's again that core versus core plus. So you mentioned that transport comes to mind. For a lot of people. It's very intuitive. We all mentioned that transport comes to mind for a lot of people. It's very intuitive. We all deal with it day to day. But the reality is you don't contract with drivers and flyers. So, by definition, transport assets tend to be a bit more economically sensitive because there is a volumetric component. I'm not saying volumes are going to disappear, but it's going to be more correlated with GDP generally speaking. So we may be a little bit more cautious, depending on how things are priced, given how I define core. And the other one which is to the full right now is really digital, which, depending on how one looks at it, right now it feels like mostly data centers, but it could be fiber or towers, et cetera.

We're in no way saying the data or AI boom isn't a significant trend.

Our main observation would be most of the investments going in there are a new build development style focus, and obviously new build always comes with a set of risks that you don't necessarily have in operating investments. There will be people who do very well out of that trend. We're just making the observation that maybe that's not the core end of the equation and obviously there's a lot of talk about digital. So maybe the the question mark is there is absolutely opportunity, but there's certainly a lot of capital looking at that space as well. So I'm not sure exactly where it will end up. But one thing we would observe is and we're seeing a lot of talk about this now the sheer power demand required and obviously on the core side, that's when you can get into renewables, gas, gen, electric utilities, et cetera. So there are core ways to think about sort of tangentially investing alongside the digital boom that maybe doesn't necessarily have the same exposures. To be clear, there is opportunity in digital. We just would say it's a different risk profile than some of the other assets.

Yep, yeah, I've got to ask this question about just electrification, digital, the need for power here domestically. I mean you get a lot of it on the news and things like that headline risk all the time around this. What I keep on reading is a lot about that. We don't have the support mechanism or the infrastructure within the electrical system currently to support the things that the headlines are kind of projecting. Do you guys see those same things? I feel like there's a lot of need for grid and expansion and improvement to handle a lot of things that are. You know, the media puts out around infrastructure and does that open up opportunities from an investment perspective as well?

I think the answer is absolutely yes, that open up opportunities from an investment perspective as well. I think the answer is absolutely yes. Even before we started to see the general AI data center boom, arguably there was significant challenges in the grid in terms of being able to build out new power, renewables, et cetera. And certainly one impact of places that have moved to renewables is that typically extends the geographic reach of where that have moved to renewables, is that typically extends the geographic reach of where these investments need to be. And obviously you need to bring it back to load centers.

The challenge has been and I think this is sort of well-known at this point is it's difficult to build new transmission in the United States, especially transmission that crosses state lines. So I think it's, on one hand, it's a known issue, known opportunity, but the barriers to changing that sit a little bit more at the federal and other levels. So what we would say is, yes, it's a challenging issue. I do think it's something that people have their eye on, but it's difficult for, say, private act capital to just solve it itself. And then you add on generative AI and data center boom and, if anything, that challenge has only got harder. So my observation would be and this isn't just true of digital, it's true of renewables development as well the connection to the grid is probably one of the biggest constraints, and I'm not the expert, but my gut would be the issue won't necessarily just be getting the NVIDIA chips. It might be even harder to get the grid connection at some point.

For new data centers.

So often the winners and losers not just in digital but in renewables too is do you have the grid access? That has become really important, but I do think solving this issue won't simply be a matter of throwing money at it. It definitely requires some permitting reform. I know that's talked about Again gets a little political, but the reality is it's been very difficult to build transmission grids across the country.

So there's going to be some sort of prioritization associated who and how someone would get grid access. I mean, is it the next charging station or is it you know what I mean for your electric car, or is it going to be for this particular plant that's going to develop a chip?

Exactly right, and obviously there's regulatory mechanisms and processes to determine how that occurs. But it really really sits there. I do think there is the interest and capital behind it, but obviously it is more than just capital considerations as to where you build, transmission or otherwise.

Yeah, you referenced AI and as it relates to digital, but I'm thinking more does AI start to help other parts of the infrastructure universe, Like whether it's natural gas or you know any pipelines, or it seems like? I feel like I've read a couple of different things with regards to the growth of that and the more efficiency that AI is producing that can help those. Are you guys seeing things outside of just the digital component?

I think that correlation really aligns, obviously, but in other parts of the digital environment, yeah, this is certainly an evolving topic and this is probably one place where infrastructure isn't necessarily unique to any other business. That's figuring out what are the best ways to get efficiencies and otherwise and otherwise. The one that jumps to my mind, and perhaps underappreciated though, is especially in the regulated utility space, customer service is a massive sort of consideration your relationship with your customers, regulators, et cetera, so often call centers and various other things how utilities serve their customers and better and more efficient ways to do that. A simplistic version is just a chat bot, for example, but that's one way that jumps to mind that may not be as intuitive as one would think.

When we get to more sort of the physical aspects, I'm sure there will be impacts, but that's the one that sort of jumps to mind right now. But obviously this is all very much evolving, so we'll see how it develops. Definitely, the focus for now is the what does this impact? Power demand and digital and data center development. But that sort of serving the customer and I know this is something we'll get to is ultimately, if your customers are unhappy, it sounds obvious, but in a utility that will directly impact your return. So I know we'll be talking ESG, but the S in ESG gets back to do your customers and regulators like you. I think that's unquestionably impactful to the outcomes for utilities and otherwise.

So we talked a lot about energy, a little bit about energy transition, something. A little bit about energy transition, something talking a little bit about energy, ai. I want to switch a little bit to the West coast, where I always I always see water being a very big issue. You know they have lots of fires and issues there. Water has always been a struggle From an investment perspective. How it seems like we need better water infrastructure, especially on that coast, where they have a different climate component to it. Where does that open up opportunities from an investment perspective? In the need perspective, I always find that infrastructure is a demand for need and then the supply from capital. That needs to merge together to develop some solution and you you mentioned it on a variety of times of partnership with local governments to get things done. But I always find water. We all need water to survive. Um, I feel that's a that's a pretty big issue, um, and that they struggle so much there. But just curious kind of your thoughts around that yeah, it's.

It's an interesting one because I get asked that a lot. I've seen a lot of investors talk about it, but finding actionable opportunities is much more difficult than one would think. And the way I sort of simplify it is I think everyone knows in certain parts of the country there's more need for water supply, but the question is always where do you get that water from? And there's a little bit of a chicken and egg here of I'll use desalination as an example. That is absolutely technically possible, but because of the power usage to desalinate the water, the cost of water out of the ocean could be and I don't know latest estimates, but it's typically multiples of what people are paying today. And so tip, and it doesn't have to be desalination, it could be new sources of water in other parts of the country. There's a bit of a chicken egg here of people know they need more water, but when the private project shows up and says, well, I need a water price of this to supply, like wait, that's a lot more than I pay today. So I do think there's opportunity. But this isn't just water, just in general that sort of well. I need more, but do I really want to pay that much more, and so I do think we've seen a couple of desalination projects built in california, more as backup backup for droughts and things like that. But I'll be interested to see how it goes.

So for me, this is one where and this isn't the only space where it becomes more of a regulatory decision to say we need more and we're willing for water bills to go up to facilitate this, need more and we're willing for water bills to go up to facilitate this. Without that, it's very difficult for private capital to say, uh, we can do this, because you, you obviously have to have the offtake agreement. So watch this space, I think. But this is one where I do think and sometimes people ask me about nuclear, for example. I do think there's a very similar analogy here that it's one of these things that's technically feasible, but the the question is what's the cost of that electricity? Likely there needs to be government involvement or support in saying we should do this. So very much in a polar opposite items, but very similar sort of dynamic in my view. What's the trigger?

to get them over that hump? I mean, are we waiting for some disaster to take place before they actually realize that we have to address those particular issues? And I'm not trying to get into the political side of it by any means, but I think everyone sees those types of things, both power-wise and water-wise to some extent, which you would seem to think that it's like necessities at this point in time in a human being's life.

Yeah, I think you're right. Just as a general statement, a sort of a crisis creates necessity in general. But I do think I'll use the California example the desalination facilities that were built. It was really at a product of the multi-year drought that they went through and now obviously that's reverted back a little bit. But you're right, it does take a little bit of. You've got to see the crisis, or however one wants to frame it in front of you to say, all right, we just have to do this. So I guess we'll see how things evolve. But it's certainly something that has investor interest, but similar to a lot of what we just said, we talked about permitting reform on transmission, ultimately, by definition, this requires public-private partnership ultimately to make pretty much everything happen. So that's really where the sits for the moment. Do you see the?

private-public partnership expanding. The private-public partnership expanding, I mean, are we there was lots of talk about it a couple, like a number of years ago, I remember, and I just haven't heard as much about it Are we? Are there still those type of things taking place where you're getting much more of a you know, a likelihood of public-private partnerships actually taking place?

Yeah, I would say yes, but it depends how one defines public-private partnerships actually taking place. Yeah, I would say yes, but it depends how one defines public-private partnership In the classic sense. For a while there was transport assets in particular, maybe monetization of those assets. Now we've seen new builds of things like desalination plants or rail lines and things like that. So there's absolutely a sort of buzz and flow. But into the structural PPP or P3, it's increased but it always has the, if you will, competition of the admissible bond market.

Governments can also do it themselves. There's reasons to go one way or the other. But I think ultimately I also expanded to in a way no one calls it this but utilities in a sense are a public-private partnership. They're regulated, private, listed, so private capital, I should say, alongside the government. So I think I sort of defining it broadly. I do think we're going to see continued investment through some of the structures that existed for a long time, building renewables and then having a contract with a local, maybe government owned utility. So there's multiple forms of it. People just maybe didn't define it as a P3.

Yeah, I tend to see more of it in the transportation space for the most part, and living in the DMV area. Here we have a number of toll roads that were funded from a public private partnership component that people, can, you know, pay money to to go a little bit faster to wherever their destination is with less, with less kind of congestion and we have plenty of congestion in this area, so people are willing to necessarily pay that. Do you see that continuing to take place? And I guess even more so on the transportation side? We just haven't seen or heard a lot about that in terms of projects and and things that I know. Transportation is a massive universe, right, we're talking rail, shipping, you know, airlines and then kind of the tradition. Well, most people probably would think it was a traditional kind of roads and bridges type of situation yeah, absolutely will we see more?

yes, but I do think you see a lot of linkages here is putting tolls in places where tolls don't exist today, whether for a government funded project or a privately funded project. That's really the for lack of a better word controversial part, and there are some federal rules around. Can you put tolls on an existing interstate as well? So for me it's more of a. We can determine how the project is funded public or private but often the question is I live in the New York City area, obviously, with just a lot of debate around congestion pricing. Often it gets back to the. This is free to me today. Do I want to pay now? That's really the challenge, if you will. In my mind, the how we fund it sort of comes later. So I do think we'll see more. But again back to this I'm paying more for it than I do today. That's a theme that permeates a lot of different parts of the asset class.

Yeah, and transportation is very different overseas, say in Europe, relative to here. I mean, they use a lot of public transportation there, with better rail systems and easier to get around where we don't necessarily have that here. It would be great if we had that. I mean, geography-wise we're much, much bigger, right, Like so I. I understand the component of you know having a larger geographical kind of space, but we also have land too which is undeveloped. Uh, in certain areas still that exists, Um, I mean those, is there still money looking at that? Uh, uh, to expand what we have from a public transportation system, uh, with with private money to it as a p3 type of investment?

yeah, there's always money looking at it. I think key thing one has to keep in mind is I'll even pick on a road. Um, you have to do the analysis of there's a certain revenue generating capacity of a road, depending on how it's constructed. That may or may not be sufficient to cover the full cost. The same is true of, say, airports, and then when you get to public transit, sort of by, I think by definition, fares, even for existing public transit typically are I'll get the number wrong 20, 30, 40% of operating costs, let alone capital. So I think it depends on the project.

But a purely privately focused project is typically pretty rare. Normally there is some kind of government contribution or loans to make it happen. So I think we're sort of circling back to the. There's no escaping that this has regulatory and government involvement in all aspects of the asset class and to go back to what we have to embrace that that's the nature of it. So absolutely there's opportunity, but it is always a joint dialogue in terms of what makes sense for consumers and taxpayers alongside private capital.

So it's economic in general, right, it's how much is going to cost, what the investor is going to make and what the taxpayer will have to pay, necessarily always. All of the above, All of the above which I figured it was the case, All of the above, All of the above which I figured it was the case. But hopefully at some point in time we can find a happy median between all of those so we can improve what we have here domestically at last. Absolutely so. One other thing I wanted to discuss with you was the ESG component of infrastructure.

Sometimes people really focused on that ESG component of things and then some people don't focus as much. I think everyone focuses on a return to some extent, uh, and how much return they get relative to ESG. So infrastructure tends to be a topic that comes up from an ESG perspective because I think it's, you know, helping the greater good of human beings just around the globe, right to add safer roads and bridges and provide transportation and all these kind of things. But, as you guys kind of discuss with other investors and as an investment, what is the kind of focus from an ESG perspective?

Yeah, and obviously it's a topic that has become somewhat controversial in various quarters. But the way I sort of think about it is there's an important and maybe unappreciated distinction at least in how I think about it, of ESG versus socially responsible investing and the way I am defining that is. Esg impact is financially material factors. We're socially responsible investing. Maybe you're a foundation, you're supporting a specific cause, you have specific views. I've sort of tangentially emphasized this a little bit already. Esg directly impacts the return and risk outcomes for infrastructure assets. I know the E part of the equation gets a lot of the attention. One way to think about the E part of the equation is often for renewables you can get long-term offtake agreements that may or may not be available in other types of powers. So if you could take a 15-year contract over a five-year contract, even if that's driven by a certain state's renewable goals, you'd say as an investor well, 15 years is better than five, okay, so that's aligned with risk and return Governance, having control operating the assets. That's probably pretty transparent and obvious. The S one is this is perhaps sounds very sort of touchy-feely in many other asset classes for us. Perhaps it sounds very sort of touchy-feely in many other asset classes. For us, customers and regulators absolutely impact and determine the outcomes for many of these investments. So I think the ultimate punchline is ESG. Financially material ESG factors directly impact infrastructure assets. Now, maybe we weren't always calling it ESG, but the reality is if you were ignoring your regulator, that was not a sensible thing to do. So again I'll say we operate in regulatory jurisdictions within this asset class.

People may have views of whether this state should be doing that or not, but ultimately that's their decision, not necessarily the decision of the private investor. The job of the private investor, or at least most private investors, is to optimize the risk-adjusted return. So we wouldn't see that as mutually exclusive. We could talk about different states in the US or Europe. I travel the globe meeting with various investor types and I think people would be surprised to learn that the commonality is often yes, I still need to make returns for my beneficiaries or for my clients in an appropriate risk-adjusted manner. Perhaps people just have a different lens sometimes of whether a certain technology or subsector will be more the future or not, but they're certainly not doing it with the mindset of the I'm going to take a lower return in order to do that. So obviously that's always up for debate, but I do think there's a lot more commonality than than people.

And everyone's social component is very different, from yours, to mine, to to anyone else that's listening. They have different views and you guys it's kind of funny because you participate in things that are reducing your carbon footprint and then things that are, you know, are your carbon footprint right, like right. So you have oil and gas and things on one side and then you have, like renewables on the other side and you're participating necessarily in both.

Yeah, and I think there's. From an asset class perspective, it's going to take a little bit of everything to have efficiency and carbon reduction etc. And there's also I've sort of alluded to it we operate in different regulatory and political jurisdictions and they have their own policy goals and objectives and it's the job of the infrastructure investor to operate within that environment. So it's not private infrastructure. Investors are not necessarily the ones determining by design how a specific energy system or structure will work. It's a joint effort and dialogue, no matter the jurisdiction that you're in.

Yeah, I mean from our perspective. We love private infrastructure investing. We think that the opportunity set is tremendous and there's always a need for infrastructure globally across it. But being able to kind of mix the feel-good component of developing things here and abroad that are going to help the overall community generate you a return whether cash flow as well as a little bit of a growth component ends up being a great mix for a private investor to kind of allocate along some of the other things they necessarily have. So thank you for being with us today. We really appreciate your comments and your insight into investing in the private infrastructure environment. Thank you very much for the time. I very much appreciate it. Great, nick.