Infrastructure: Today’s “Generational” Investment Opportunity

Diana Sands (0:04)

Hello, and welcome to The Allocation from Apollo. I'm Diana Sands, Managing Director in our Client and Product Solutions Group, and your host for this episode. Today's topic is infrastructure, and I am delighted to be joined by two longtime infrastructure investors and partners of the firm. Harry Seekings is joining us from London today. He is Chair of Apollo Infrastructure Group, and Vittorio Lacagnina, here in New York City, who leads capital formation for the sector.

So welcome to both of you.

As I mentioned, both are longtime investors in the infrastructure space, and so I'd love for them to kick us off with a bit of their history in the asset class and experience to date. We will start our discussion with Harry.

Harry Seekings (0:48)

Thanks, Diana. Long-standing, but hopefully not long in the teeth. I first started in the infrastructure world in 1998, and that's really before infrastructure was even broadly recognized as an asset class. I started in advisory, I moved into financing, but very quickly ended up in investment roles, and then fund management, senior management. I spent seven years after the GFC living in New York, where I was sourcing and executing value-add deals. The North American market, when the North American market really was in its infancy, and that's actually when I first met Vittorio as well. We were both, I guess, not pioneers, but we were in a market that was just definitely in its early stages.

Vittorio Lacagnina (1:23)

Harry and I go back quite a long time, and much like Harry, my career in infrastructure has been anything but linear. I started in the late 90s privatizing utilities, doing M&A before it was cool, before they were called Infra. Spent my time across advisory, project finance, principal investing, and now I run this hybrid role where I sit on the investment committee working very closely with Harry for our flagship funds, but also working and looking after capital formation.

Diana Sands (1:49)

That's great, and Vittorio, maybe take us through a little bit more of Apollo's history in infrastructure.

Vittorio Lacagnina (1:56)

Apollo platform is a 35 year history in infrastructure, which is what most people don't realize, because Apollo is often thought of as a very large private credit manager or a very large private equity platform, but infrastructure really runs across a lot of deals that were done in the past. Sometimes we would allocate them to our private credit funds or to our other capital pools. When we put it all together over the last five years, we stepped up our origination efforts in infrastructure. We did originate about $150 billion in transaction. What I'd like to emphasize is that this is not about scale, this is about philosophy. Apollo is born as a value investor. One of our mottoes is Purchase Price Matters. That's a meaningfully different posture to what we have seen in the post-GFC, in that disinflationary period from 2008 until 2018, obviously globalization was a disinflationary force. The integration of China, for example, in the global economy led to expanded labor, manufacturing supplies, pricing gone down, and rates were kept low. That era has ended pretty much as we know it. De-globalization, aging demographics, energy transition, the power, the massive capex cycle now related to power and digital. These are structurally inflationary force. And so in that work, hard, long-lived physical asset, we contract the revenues and CPI escalators are not just offensive. They're actually a way to invest in an offensive way. And that's what you want to own when the monetary regime has changed. And then there's another thing. Apollo has a large part of its balance sheet, is affiliate balance sheet through our insurance affiliates, Apollo, Athene and other acquisitions that we've done. And those businesses really invest alongside us in infrastructure. It's an asset class that jives very well with an insurance balance sheet. And so for our clients, that translates into two things. One is alignment. And the other thing is hopefully a better sharp ratio, meaning a higher unit of return per unit of risk that we take all across the risk return spectrum of infrastructure investing.

Diana Sands (4:03)

And I want to just define infrastructure before we get too much further into this. And so when we think about infrastructure, you mentioned Vittorio, hard assets, long-lived assets that maybe play a fundamental role to the ongoing functioning of our day-to-day economy. I think we tend to think about it in a couple of key sectors, but maybe again, just define that for me.

Vittorio Lacagnina (4:24)

When we think about infrastructure, one of our saying internally is if you kick it at heart. So think about a hard asset, think about assets that can create a collateral for the investment. There are a number of defining characteristics for infrastructure beyond the hard asset concept. These are visibility on returns and stability of earnings. We deal with assets that are regulated, and so there is a formulaic way to establish revenues. We deal with assets that are contracted for the long term. So you have these visible streams of cash flows from often investment grade quality counterparties that work to our advantage. When you see assets that fulfill a very essential service, I think the key is really to build a portfolio that looks at all these characteristics on a portfolio basis. The element of stability of earnings is really about the capital structure, and so is adapting the capital structure to the investments that you're making.