“For an economy built to last, we must invest in what will fuel us for generations to come. This is our history – from the Transcontinental Railroad to the Hoover Dam, to the dredging of our ports and building of our most historic bridges – our American ancestors prioritized growth and investment in our nation’s infrastructure.” –Cory Booker
Nork
As I was recently in Newark, NJ, to witness the naturalization ceremony of a group of our now fellow Americans, a quote from Cory Booker – former mayor of that same infamous metropolis – seemed like an appropriate jumping-off point to continue our discussion on infrastructure. And like immigration, infrastructure has been an irreplaceable ingredient in the American recipe for economic growth and prosperity. [Fun fact: Newark is locally pronounced as “Nork.” Shoutout to Brendan – our resident expert on NYC / NJ geography – for that insight.] Here we go!
Magnifying impact
We’ve previously defined “impact” as helping others and society flourish. One way of consistently creating impact is by fully embracing and applying our abilities daily (aka “work,” a word I can’t invoke without mentioning David Bahnsen’s latest book on that subject; Full-Time: Work and the Meaning of Life). We can and should make the small decisions within our various roles (e.g., employee, employer, parent, student, patron, member, etc.) to continually drive positive progress for ourselves and those in our immediate vicinity.
But how might one take that same notion and magnify it? The answer is via infrastructure! Rather than provide fresh water or electricity to a mere handful of people via local streams, we have built water utilities, power plants, and related delivery systems that afford those resources to millions. Instead of limiting commerce to local markets, extensive networks of roads, rails, airplanes, ships, ports, and cables/computers allow us to interact with a global audience – both physically and virtually – often with little cost.
As a more tangible example of how far we’ve come, a client (thanks, Alex) recently relayed a story: A few decades ago, an east-coast man purchased a car from a seller in the western US by first requesting Polaroid photos via (snail)mail to see what it looked like – a process that took weeks. Fast-forward to today, thanks to digital infrastructure, snapping pictures on a smartphone and sending them almost anywhere in the world may take only a few minutes (or less). Incredible? Yes. Taken for granted constantly? Absolutely.
Tech’s brother from another mother
We don’t hear it enough (or ever), as infrastructure is seldom (or never) the hot investment making headlines. What does tend to grab headlines consistently, however, is Technology. But I don’t think we’re excited about tech for tech’s sake; instead, we’re excited about tech’s ability to solve problems, much of which relates to the scaffolding of the world around us (aka infrastructure). Scientific advancements make increasingly better infrastructure possible, and then that enhanced framework (e.g., greater efficiencies, communication, data synthesis, computing power, etc.) sets the stage for the next significant advancements. It’s a symbiotic relationship resulting in a beautiful iterative process as old as the human race. Here are some cutting-edge examples:
- Cryptocurrencies: Made possible by the previous global digital infrastructure of the “old” internet, they’re the new backbone of the next-gen internet (i.e., the infrastructure of Web3) that will drive data integrity and currently unimaginable solutions for our future selves.
- AI: More important than writing subpar college essays, the real promise of Artificial Intelligence will be enhancing our ability to do the things we already do (like our jobs) in better, more enjoyable ways – allowing us to focus more on important, value-add activities (instead of spending 20 minutes of our day manually logging emails into Salesforce, as one off-the-cuff example 😊), and that’s exciting.
Tech may be the thread, but infrastructure is the fabric of our lives.
When the Levee Breaks or Stairway to Heaven?
We don’t know precisely what the infrastructure need is, but what’s not debatable is that there’s a massive, seemingly infinite need for infrastructure (perhaps this should be added to the list of certainties in life, but “death, taxes, and an endless need for infrastructure” isn’t quite as pithy), and a focus on these solutions can easily be part of an investor’s impact agenda.
Infrastructure isn’t a nice to have; it’s the need-to-have backbone of human flourishing. It must be addressed continually, and Led Zeppelin (who just so happens to be the greatest rock band of all time) nicely captures the dichotomy of outcomes we face with the two above tunes: underinvestment can cause total destruction, or adequate investment can be our step-by-step path to the promised land (at least within our earthly bounds). Some areas are more investable than others, but there are myriad ways to put money to work in infrastructure. And keep that FOMO (fear of missing out) in check until we dive deeper because you probably already have some infrastructure exposure in your portfolio but aren’t aware of it.
You’re an infrastructure investor…
Infrastructure is everywhere, and the same is true of infrastructure investments. Even for the most plain-vanilla index investor, exposure to energy, technology, transportation, communications, and utility companies (all tied into infrastructure) is inescapable. Even a portfolio of high-quality municipal bonds (which we lovingly call “boring”) will typically be infrastructure-heavy, with toll roads, tunnels, bridges, hospitals, and schools among the holdings. In either case, investors own or lend to vital infrastructure initiatives but may be unaware of it.
Regarding the portfolios we manage for clients, if you’re a TBG Dividend Growth investor, rest assured you already have significant infrastructure representation. The more apparent exposures are utilities, 5G, digital solutions, and energy (especially MLPs, which are often literally pipeline companies), but the less obvious framework behind eating, shopping, and banking is heavily represented. And then there are publicly traded private equity stocks that own and lend to many private businesses that quietly comprise the backdrop of our lives.
The important caveat to these types of exposures is that it’s not being done to obtain the characteristics Alts nerds think of when the word “infrastructure” is uttered: e.g., boring, consistently cash flowing, low volatility, predictable.
…even if “infrastructure” isn’t written on the label
When it comes to “actual” infrastructure investments, these come in all shapes and sizes. Given traditional infrastructure projects’ scale and highly illiquid nature, investment was historically relegated mainly to institutional investors or at least qualified purchasers with deep enough pockets to meet steep minimums (e.g., $5 million – and you’d likely want to have at least $100 million portfolio to be putting $5 million in a single infrastructure fund).
On the liquid side, there have also been attempts at “infrastructure” mutual funds, but those have naturally been limited to the types of companies we discussed above; thus, while they are undoubtedly investing in infrastructure, they will feel exactly like a publicly traded equity portfolio (I’ll let you guess why that is).
The good news is that – just as we’ve seen in other areas of Alts – more investor-friendly yet truly alternative solutions are now gaining traction via structures like interval funds. [As a brief refresher, interval funds are open-ended funds that can accept new investments and provide liquidity on an ongoing basis. The key, however, is that they can restrict liquidity, which BREIT made headlines for over the past couple of years – a feature, not a bug, I assure you]. Those structures allow the manager to invest in a significant amount of less-liquid holdings – like direct infrastructure – while providing more convenient investment terms (like taking all of an investor’s capital up front) and some degree of liquidity.
That liquidity comes at a cost: the entire portfolio cannot be fully illiquid infrastructure, as it can in traditional drawdown private equity vehicles. Thus, investors should expect more muted IRRs (internal rates of return) from interval funds vs. drawdown structures. BUT, being able to deploy all capital on day one (rather than a sometimes slow and painful series of capital calls), getting cashflow from day one, and getting that lower IRR on all of the money (along with 1099 tax reporting, instead of K-1s), can realistically wash out a lot of the perceived difference.
Bring It on Home
Yes, it’s yet another Zeppelin title to bring us to the finish line of this series (conveniently, a song with the infrastructure-related lyrics of a “train goin’ down the track”). In this four-part conversation, we talked about our “Why?” We discussed how gauging the alignment of personal values with investment portfolios is often not straightforward. We contemplated what actions we could take to make a positive impact (i.e., helping others flourish) and explored how infrastructure magnifies that impact. That all, in a nutshell, is Impa-structure.
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
