Financing the Next Generation of Infrastructure

Well, good afternoon everyone. Um, so looks like we have uh an easy session just after lunch. Try to keep everyone engaged. Um, delighted to be here. So, just jumping in immediately.

Um, so infrastructure today is no longer just roads and bridges. It's the power systems, the digital backbone that enables AI clouds and high growth industries. Investors are rotating capital into these assets for resilient cash flows and inflation linkage. But there's a challenge. Underwriting is getting more complex.

Structures are getting more challenging. So over the next session, we'll decode where the bankability bottlenecks really are, how partnerships can scale, capital efficiency, and how regional modu uh mandates are evolving across the AC across this region as well as comparable regions. So and then we'll try to close with clear actionable takeaways for investors that they can move on in the next quarter. So uh Hanan has kindly introduced our three leaders and we'll engage quickly with them and see how we can deploy and structure capital across the regions. So let's just see what really works, what's bankable now, what's next and how investors should do in Q1.

I'll start with you David. Um so let's just start with the fundamentals. Where are the bankability bottlenecks showing up in today's deals? Yeah. Um, thanks.

Thanks very much and and great to be here. Um, I mean certainly our experience, you know, we're an Asian-based private credit manager. Um, but we have been in the region for, uh, 28 years and a lot of our business is now expanding out to the Gulf region. And I think um you know with with banks in terms of deposit holding institutions um typically we find that they're there once some of these projects are up and running uh the cash flows are there and they have been proven to be viable and I think where private credit steps in is through being able to come up with heavily structured instruments that enable um entrepreneurs, business owners um you know the ability to use our money to get those projects to the the bankability stage. Um that's certainly been our experience.

And do do you still see a focus the same focus on structures? You know, typically infrastructure projects have been heavily structured or is it more about just due diligencing and finding the right bespoke partnership? Someone on the previous panel mentioned just uh being in an industry where where there's a barrier to entry. Yeah, look, it's it's multifaceted. Um, obviously if a project can stand up on its own fundamentals, um, you know, that's the the ultimate proof in the pudding.

Um, but inevitably, in particular, say with energy transition, there needs to be a little bit more of a catalytic role um, in getting private capital to bank these types of projects. So at the fund level, you know, we work with governmentbacked entities that are very much focused on this energy transition story and they can provide a first loss or a guarantee to the fund that then enables more um I guess say financially motivated capital to come in uh to to pick up the residual amount of that fund. Then at the project level, um, yeah, like fixed price PPAs, uh, which enable us as a lender to be able to take out some of the variability of the underwriting process definitely helps. That said, you still need to look through and if something goes wrong, you know, what's the what's the reality of the counterparty to pay you back. So yeah, it's um multifaceted, but but ultimately you want to be banking projects that can stand on their own two feet.

uh and and and then the capital comes.

Okay. Well, we'll come later on to those partnerships with uh blended finance providers in particular. So, it drawing on uh Alian GI's private markets approach with the infrastructure asset class, where are the biggest bottlenecks uh and how is private credit addressing some of these risks?

Yeah, so number one, thank you Muhammad for moderating and also thanks for Ama for putting it such a great agenda this this afternoon. Um maybe as way of background just on our AGI private market platform and how we've been investing in infrastructure for almost 30 years or we are 120 billion private market platform uh 50% of which is investing in infrastructure both equity and debt primarily uh into Europe but more and more globally. So we created this program on the back of Alian's balance sheet willing to match their long-term liabilities with the right level of assets and the right type of assets on on the on the asset side in terms of matching the cash flows with the liability stream. So that's the genesis of uh what we've been doing and over the years we diversified away from Europe into LATAM into the US and now also into Africa and the MINA region as well as into Asia. So that's the platform as it stands today.

Going back to your question, what does that mean in terms of bottlenecks? Um we are insurance by nature. So we are looking at the downside risks but more and more the way we look at structuring deals is about what type of inputs is important in order to structure those those deals. One is if you expand away from uh certain jurisdictions is obviously regulatory regimes. So that is very important we do the right level of due diligence.

um more and more we are um programming and um applying certain capex allowances and we also pass on some of these risks to commercial structures like um pass through vehicles or requiring minimum uh customer contracts into into the deals. So that's on the regulatory front. When it comes to ESG considerations, if you invest in the region for instance, the access to green power is going to be very important as you invest into data centers for instance. Uh but also a consideration around cooling and uh what happens with wasted water. So all of this flows into how you structure, how you price the deal.

So more than bottlenecks, we see that as design inputs that you need to uh program and you need to plan for the long term. Thank you, Edoir. Thomas, data center is really the bread and butter of what you do in terms of um structuring and and and building these project from the bottom up. How do you see the tension between supply chain, energy, power costs and energy transition strategy and requirements which um um which Ed mentioned Thomas, how do you see this being managed in the context of uh high pressure uh quick tomarket projects? Yeah, thank you Mohammed.

That's a great question actually. Um, so let me maybe take a step back. We we are convinced that the the world is uh is going to be driven by capexled growth um instead of consumer-led growth going forward. So what you know capex means high risk of misallocation of of capital. Those capex should be concentrated on what McKenz called the the four Ds.

So decarbonation, digitalization, defense, deglobalization and of course I mean building the right asset at the right place at the right time is is not uh uh you know uh is something which is very difficult to do. So that's why somebody like Warren Buffett says that when there is a lot of capex in a sector you need to either avoid the sector or be extremely selective. So first of all there is an opportunity but there is also a big risk of misallocation of capital. Hence your your your question. Now with regards to digital infrastructure, there is obviously a huge capex need next year probably $500 billion will be spent there growing at 20% keger.

So $800 billion in three years which is kind of the equivalent of the US defense budget. So it's a lot of money. Um you know couple of you know you know the pools of financing are you know are now getting more structured. So hyperscalers have access to both the bond market and the private credit uh to uh to finance their uh their spending. There is still a lot of leeway despite the fact that this year there's been there's been massive issuance of of bonds um according to Goldman Sachs in order for those hyperscalers to reach one time aid uh they can still issue like 700 billion of of debt.

So there is still a lot to do. Then you have banks financing between four and 8% projects that are de-risk. So where the uh there is no commercial risk taken and then in between there is space for private credit probably um you know the private credit is only uh explaining 5% of the specialty finance. So it's it's a 5.5 trillion market uh specialty finance uh needs at the moment.

So there is still a lot of space to to grow and we think that there is a sweet spot here um to finance data centers in good locations that have secured their building permits secured their access to power but by taking construction risk and commercialization risk you can finance at double digit return and there probably there is space for private credit. Okay. So maybe staying with you in terms of how the scaling of these projects and you know the meeting the demands of this big pipeline. I mean not all data centers have a guaranteed 30-year cash flow with Google or Microsoft. So are you seeing kind of these different templates for different participants or market participants?

Yeah. First I mean there is supply when you I mean 70% of data centers currently are built in the in the US. So if there is a risk of over supply, it's probably there. I'm not saying that there is one, but you know, for example, in Europe, Europe is is trying to catch up uh with with that uh and so the risk of I would say over supply in Europe for now is is contained. Now, of course, as you said, I mean uh not all projects are equal.

For us, there are there are three things that are very important to uh in our selectivity. The first one is location. I mean we also manage 15 billion euros of real estate and our moto is you know location. You can buy good assets in good location or develop good assets in good location and then you you know uh it's kind of core uh uh real estate. You can you can buy bad assets in good location and transform them and it's value ad but never buy uh or develop assets in bad locations.

two is probably the credit quality of the end user and and and you're right I mean when it's when it's Google or Amazon that's probably fine uh but it's not always the case so you need to be very careful about about that and then you have the time to power time to power is very important because you know the of course there is a you know this this industry puts a lot of pressure on the grid um so securing access to power is one thing but you know uh time to power is another one so you need to be extremely selective on on on Okay, thanks helpful Edoir earlier just talking about kind of the ability to scale uh to meet the demand. You mentioned blended finance or involving different participants uh and building on how these partnership can be can be structured. So it'd be helpful to get your perspective on how the role you can see blended finance as one of the major source of finance and the tools and instruments that are being deployed on some of these that you're investing in.

Yeah. So I'm happy to bring a bit of a context of how we see investment partnerships um with uh institutions sovereign wealth funds and and other institution on the pension side because at the end of the day when you invest in infrastructure you want to have alignment of interest of how you invest and also what you invest in right so some of the organizations think about investing in the future economic models that will drive future performance um into their portfolios and how they invest is um about uh having alignment of interest and but also how we structure those um those those transactions. So when it comes to regulatory and licensing considerations, so yes, you need to look into the specifics country by country. But to your question, indeed if you go to lower rated jurisdictions, investing alongside DFIs for instance via participation loans allows to share the risks and in that respect in particular for pension funds. we're looking at a more senior um part of the transaction that will allow for them to participate uh into certain jurisdictions.

So that is one aspect. What we also see is with large scale organization, pension fund, sovereign wealth funds and and others, they're looking into SMAs, very particular bespoke um co-investments leave for instance or Sharia compliance structures and in that respect that increases the demand for very specific guidelines for very specific criteria to invest. And last but not least on the ESG side and you talked about particular countries Africa or emerging markets and then indeed um requirements for environmental and social uh considerations are going to be even higher KYC AML considerations and so here it is all about how you structure those partnerships with the right level of risk return but also understanding that over the life cycle of these investments you need to provide transparency on ESG on certain risk but also uh in terms of reporting you need to be um at the forefront of this.

Thank you. Thank you Ed. I think David when we were discussing preparing this session you told me you're passionate about the challenges of ESG and the reporting and also you operate in a variety of markets across across Asia. So it' be helpful to draw on that experience as to how you know you allocate some of these risks whether you know sovereign related risks uh or or ESG requirements and and and whether there are some major showstoppers for in investors or lenders in from your point of view. Yeah, I'd say generally speaking, you know, our experience has been that, you know, when you're looking to finance these projects, um, you are able to pass a lot of the say obligations on to the borrower.

Um, there's not a sort of a deep pool of other options for these borrowers and, you know, um, you know, political events, uh, change in business plans, things like that. uh you know typically in our loan agreements we would say um you know that is the borrower's responsibility and it would trigger an event of default. Um so you know wash your hands job done but uh in reality you know when these events happen that's when you know managers with experience need to roll up their sleeves uh get their hands dirty really understand how well first of all to preserve the money that you're managing. to make sure that you can not lose value and two start suggesting ideas um exploring different options to pivot these businesses to turn them around and ultimately create a liquidity event to get your money back. Um in terms of ESG that's a core part of our our business.

Uh we believe we have a fidicial responsibility to take those factors into consideration when underwriting our loans. Um it's prudent from a riskmanagement perspective. There seems to be more and more environmental disasters and social issues happening. Uh and you know we think and have experience that if you address these issues then you've done a good job in uh protecting your your investors money. Now now the key here as well is if you can create that win-win scenario so where the borrower also gets the benefit to their bottom line and we've got numerous examples of that as well which is you know It's when you you know you're really on to something good.

So you're not just managing it from a risk perspective, but you're adding value and creating options for the borrowers that you lend to.

Thanks David. So let's just zoom out and see how you see some of the regional trends, opportunities also some of the lessons learned from your other markets uh the potentially reshaping the opportunity here for for investors. So, so just David staying with you, uh I understand a number of your Asian borrowers are looking to expand into the Mina region. Can you talk about some of the prerequisites for these businesses to be successful in their in their expansion?

Yeah, I think um you know the growth in the region here is is is super exciting. You know, we we we're all here. We all we all buy into that. Um and a lot of the borrowers that we have in in Asia are now seeing this potential and are exploring their options out here. Um a couple of examples uh a Chinese-based school um which is looking to to come over here and address the ever growing Chinese expatriate expatriate community that's building here.

um you know, those parents and their kids will ultimately want to be able to um go go back home and send their kids into a schooling system that's um or you have their kids at a schooling system here that's aligned with the the national project in China. Uh we've also got interest in a Australianbased uh organic silicon fertilizer business which is um one or couple of its largest customers are based in this region and also geographically it makes sense to expand uh production and distribution from this region as well. So um you know the region is is is pro business. So that's super positive. uh you know the governments are doing a lot to help provide the infrastructure that's needed for these corporates to move out here

and in terms of structuring these projects having um kind of a local in terms of the equity of these projects are you relying on the expertise of these borrowers or do you see partnering with governments or partnering with sovereign wealth funds as being key for the success of these projects? Yeah, look, it's it's not dissimilar to what we saw in in in Asia or see in Asia where um you're quite naive if you think you can, you know, go and build a school in a foreign country where you don't have much knowledge or knowhow. So, definitely partnering with locals, experts here is critical to the success of these projects that are coming out. Uh yeah,

great. Thanks. Thanks, David. Ed, just moving to you in terms of kind of the regions ambitions. Um I'd like to draw on your global insights around across geographies and what you see also across in infrastructure assets.

Do you still be a see a big focus on on mitigance highly structured projects you know escrow waterfalls offshore hold codes jurisdiction for dispute resolution mechanisms political risk cover. Are these still kind of key components of it or do you think people are starting to try to be a bit more nimble in terms of how they structure those projects? So being interviewed by a lawyer, I knew we would be asked the technical questions on on structuring um and and I talked earlier about design inputs for how we structure deals. Indeed, you need to think about what could go wrong, right? So because you work in multiple jurisdictions, you um acquire capital offshore that you're going to be redeploying in different regions and in that respect um thinking about the risk scenarios is critical on on how you're going to structure those those transactions.

So there are a few things uh we look into um number one more from a structural point of view. So do you have uh as an instance offshore hold calls or offshore accounts that allow you to tap into certain pools of money if uh all of a sudden in this given jurisdiction you're going to have capital freeze or you're going to have capital retention right so this is one of the structure uh that we look into and if you have for instance export-led projects indeed pledging uh offshore rece receivables can be quite powerful on how you structure your deals. So that would be on the on the structural side. On the contractual side, um we're going to be looking at international arbitration with um recognition treaties. Um thinking about what could happen if there is a change of laws or certain sanctions that are imposed on a given country.

Right? So already from the outset thinking about uh these type of events and making sure that you have covenants in place that uh will apply in earlier on in those events before those projects default. So that's another aspect and going to your earlier question about mitigants uh and also partnering with DFI. So MIGA um um policies or insurance ECA guarantees but also co-investing with DFIs who are going to be providing the first loss capital are another way of structure those deals when you invest in in emerging markets. It's fantastic to see uh kind of staying away from some of the exuberance that you know private capital have been kind of associated with I guess recently.

So I think you know I guess in the infrastructure space that kind of more boring approach I think is still kind of an important component and less boring I guess is kind of uh data centers and TKO has been really heavily involved in that in that uh space to a number of countries in the region have floated ambitious plans uh to deploy their own data centers um that's sometimes f fueled by local requirements for data localization and that's you AI has poured fuel on that fire. So how do you see that macro trend implementation in the context of some other geographies which are less obvious than the 70% in the US for example?

Look I I think this country um this country here um the Emirates have um expressed very clearly their willingness to leading the way with regards to uh AI and um you know digital infrastructure in the region. Um so you know we've we've opened an office a couple of years ago. We have investment teams on the grounds. Um and so what we are trying to do right now in the region with uh regards to digital infrastructure is two things. First is transferring the expertise that we've built uh essentially in Europe uh here and probably partnering with the local investors here to build the platform because this is clearly a business where you need to be local.

I mean you need to be local in everything you do but particularly in this in this uh in this business. So entertaining a couple of discussions around that but also um if you want to develop you know data centers and digital infrastructure you need a supply chain um and through our so we also have a strong expertise on private equity decarbonation. We pioneered this uh business in 2018 by launching the first ever private equity fund dedicated to energy transition. in this uh fund uh in in those two funds actually we have companies that that are a play on on on digital infrastructure for example one one company is a German company called TTSP it's engineering company specialized in optimizing the use of water and electricity for data centers they have a 50% market share in Germany and and and so this is a company we could help to to you know to settle here uh to be part of the supply chain same on you know maintenance of power cable We we own a company in Italy uh specialized in that. They've been involved in six of the eight uh buildings of data centers of more than 10 megawatt in Italy of which three for Microsoft.

This company also could you know uh and we will we will develop this company outside of of Italy and and and and the region could be also an outcome. So I guess it's also make sure that the infrastructure is in place in terms of supply chain by bringing some of our portfolio companies to the region if there is interest from local investors.

So transferring human capital knowledge supply chain is essential. Now looking at the future outlook and it's kind of the theme kind of the last theme we'll touch on. If you were to look at uh what most would accelerate you know regulatory change or other change would accelerate private capital participation in data center projects and digital infrastructure what what would that be? So look first I mean I think there is a clear trend um if you look at private credit so two trillion a bit more than two trillion dollar market right now 43% of that is comes from insurance flows um and if you look so that's the AUM in terms of flows more than 50% of the growth of private credit today comes from the insurance uh business and especially you know long-term liabilities is looking to be matched by uh private credit investments. So those players are looking for long-term stable cash flows, long-term stable investments in inflation protected.

So there is a clear trend towards um I think

that's going to happen no matter what

it's going to happen. Now if you look at you know in the US there is something that doesn't exist elsewhere and it's the securitization business. So securitization of data center financing where those insurance companies can take you know a senior uh sleeve of a securization helps a lot the flows the the capital flows in the US to finance uh this this mega trend in Europe it's not the case yet because

ask well to give his perspective do you see tokenization or you know as being uh uh the future of of the industry

I think tokenization will be a tool indeed to allow for more liquidity and more participation of various investors. But if you ask me um let's join forces first around institutions. Uh the opportunity to invest in opportunity in in infrastructure are gigantic. Uh we need over 100 trillion dollars of investment in the next 15 years to support economic growth. So it's all about joining forces uh between pension fund, insurance companies, sovereign wealth fund, DFIs and yes on the wealth side we will see heightened participation but in that respect tokenization will be a tool but for now I think we're sticking to certain basics.

So, we're running out of time and I've been asked to give, you know, um, you know, just as a wrap-up, you know, uh, to to look at each of you as to one actionable takeaway for investors that they can implement going forward. But David, let's just start with you.

Yeah, look, I I mean, the energy in, you know, here in the room, um, at this seminar is super infectious. Uh, it reminds me of sort of Hong Kong and and Asia 30 years ago. And with the government being so pro business, um, you know, I can only hope that ADM Capital's, you know, part of this growth plan.

Okay, thanks Ed.

I'll keep it short. Let's join forces.

All right, Tom.

No, I think rooting capital towards the financing of resilience and sovereignty is in the interest of everybody everywhere in the world. So, let's make it happen.

All right. Thank you.

Please put your hands together for our panel members.