Real assets have the potential to offer investors a lot in ‘green’ areas such as renewable energy, green mobility, circular economy, battery storage, hydrogen, and carbon capture. Head of Real Assets Karen Azoulay discusses the features and trends of this dynamic asset class.
Private markets, and in particular real assets, offer a potentially attractive risk/return profile. In absolute terms, their yield is now interesting. That is even more so given current interest rate conditions. At the same time, real assets can provide stable and regular cash-flows – so, dependable income streams for investors. Strategies providing a cash yield over the long term can be a good fit for investors needing regular payouts.
This asset class also offers diversification and can provide inflation protection and stability in times of crises including the recent spike in inflation, the Ukraine war, and the energy crisis. Real asset portfolios have proven resilient given that the revenues of portfolio companies are typically inflation-linked, while returns are mostly de-correlated from traditional credit asset classes or economic cycles.
In our view, that resilience is also a product of our investment philosophy and approach. Being part of a larger private assets’ platform means we have dedicated professionals to support our strategies.
Given that the asset class is quite illiquid, it’s essential to have a strong origination capability – we benefit from having team members from many different backgrounds; they form a network that is complemented by a privileged access to the origination capacity of BNP Paribas as a group.
A further notable feature is our thorough ESG (environmental, social and governance) process that is fully embedded into our investment approach thanks to our in-house sustainability centre.
Real asset trends
We are seeing a trend towards energy transition as well as digital infrastructure. With renewable energy now competitive, there is less of a need for subsidised tariffs. As a result, more players are moving into the renewable space. As investors, we are analysing those developments closely.
Beyond renewables, we are seeing new themes emerging around the energy transition. For example, hydrogen, battery storage, and biogas. We are also seeing interesting opportunities around green mobility − rail electrification across Europe, and electric vehicles charging platforms, for instance.
We have been active in the energy transition segment since the early days. Combined with the access we have to the wider BNP Paribas group for origination, we believe we are in a strong position. When we decide to invest in a new sector, we can now rely on industry experts that can provide us with insights, even local market insights, across Europe.
We are also focusing on digital infrastructure. With fibre optic networks now more or less available across Europe, we are now seeing the issuance to fund that expansion being refinanced. Furthermore, we are active in green – energy-efficient – datacentres and digital towers.
The latter area has seen a lot of mergers and acquisitions as well as and refinancing, boosting dent transaction volumes. This segment has been quite resilient – we continue to see a fair number of transactions. We believe we are one of the main players here, both for senior and junior debt.
Public to private
Infrastructure investing has evolved from financing large and tangible assets that benefited from a regulated tariff or a contractual framework relying on a public entity to an area where there is more scope for private sector participation.
Because governments now have less money to spend on infrastructure, there is an opportunity for private money to come in. Here, institutional investors such as pension funds can play a key role: by investing in sustainable assets, they can not only tick the sustainability box in their list of requirements, but also benefit from the connection between sustainability and long-term performance.
The mindset among pension funds has changed – they now understand that connection and realise that investing sustainably is not detrimental to returns. Some might argue that assets are more difficult to deploy if you have strong ESG policies and constraints, but we believe that’s not the case at all.
Mitigating risk
One element centres on diversification across sectors or geographies – not themes, a specific regulatory framework or a specific country situation. We believe portfolios should be diversified across jurisdictions and markets with different features. As investors, we want to be totally flexible in our investment decisions.
When it comes to new sectors, there’s a strong need for specialised skills to be able to analyse and invest in them. Investing in hydrogen, battery storage, or biogas is completely different from traditional infrastructure such as motorways, airports, or ports. Very specific skills are required to be able to invest even for the more straightforward sectors such as renewable energy.
We believe we have the internal capacity to analyse those sectors. Being part of a larger group that is at the forefront of those areas is a true differentiating factor in our view.
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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