ASGI Fund Update August 2023

In this episode we are focusing on global infrastructure investing with a manager of the abrdn Global Infrastructure Income Fund - ticker ASGI

Transcript

Paul Blane: Hello everyone and welcome to the latest in the abrdn Closed-end Fund podcast series, where we catch up with our portfolio managers from around the globe to gain some perspective on the state of the markets and the abrdn closed-end funds. I'm your host Paul Blane, Senior Director with the National Accounts Team, and today we're focusing on the abrdn Global Infrastructure Income Fund (ticker - ASGI). So, it's my pleasure to welcome Josh Duitz, Head of Global Income and Infrastructure and Eric Purington, Private Markets Portfolio Manager. Gentlemen, thanks for being here. It's great to see you.

Josh Duitz: Nice seeing you, Paul. Thanks for having us. 

Eric Purington: Yeah, good to be here.

Paul: Absolutely. So, gentlemen, if you wouldn't mind, would you share the overall strategy of ASGI, the abrdn Global Infrastructure Income Fund? 

Josh:  So, we launched our first infrastructure fund, almost 15 years ago, that was AIFRS, when we invested in publicly listed securities. We did it by researching where infrastructure spending was going to take place, both by region and by sector, and that's what we still use as a framework today. One of the interesting trends that we noticed over the past 15 years is the amount of money that institutional investors have been investing in private infrastructure. Overall, there's over $1 trillion invested in both public and private infrastructure and that's been increasing about 17% a year over the last decade. And we noticed that the retail investors did not have that opportunity to invest alongside institutional investors in private infrastructure and that's why we launched ASGI in 2020. The fund is allowed to hold up to 25% in private infrastructure and it really gives the retail investor the opportunity to invest along with institutional investors to try to capture the ups of investing in infrastructure. In infrastructure, we're trying to invest in four different sectors - the transportation sector, which includes invested in ports, airports, roads, bridges, globally; the communication sector, which includes investment in the wireless towers; the utility sector; and the energy sector, and the energy sector is really on the midstream side of it. We don't try and invest in BNPs and we do not invest in any MLPs in this fund as well. I'm going to let Eric talk a little bit about the private investments.

Eric: Thanks, Josh. So, these are minority investments in private infrastructure, businesses, and assets, often alongside private equity managers we work with as part of abrdn's $6 billion private infrastructure business. Just to be clear, these are opportunities not available anywhere else in the public markets. As of today, we have nine investments in the private markets, currently about 12% of NAV and we’re targeting 25% of NAV invested in private infrastructure investments for ASGI. We look at hundreds of opportunities in private infrastructure, seeking companies and assets that have characteristics that Josh mentioned, as well as strong management teams in good markets. Generally, we focus on the middle market, that means companies with enterprise values typically less than a half a billion dollars, and often a lot smaller, with business strategies that can often be described in one sentence. We have an abundance of options and we only take the best ones. We focus on the markets, the business models, and the management companies we like. 

Paul: Ah gentleman, that was great. Thank you very much for that overall strategy picture. So, Josh let's turn to you directly. Would you mind taking us a step back and just kind of giving us an overview of the infrastructure markets as a whole, in particular, in the closed-end fund space?

Josh: Sure. So, as I mentioned, there’s four different sectors and I think it's important to go through each sector, but first one thing I'd like to say about the infrastructure universe and infrastructure investment in general. Since we've been started, we've talked a lot, and I'm not the only infrastructure manager to have talked about it, is about the defensiveness of infrastructure assets, the inflation protection component to it as well. Now, if you look back all the way back, even during the GFC infrastructure listed EBIT our growth, so it is defensive. The only time it didn't is during the COVID crisis of 2020, which we could talk about. But also, there's an inflation protection component to it and that wasn't really tested. And it was tested for the first time, last year in 2022 where we saw infrastructure funds show the defensiveness and inflation protection by outperforming. So, what are we seeing this year in the different sectors and what do we think about that going forward? And I'll start in the transportation sector, and that sector has really outperformed quite a bit this year specifically on the airport side. And again, we've talked about that on prior podcasts. And the reason for that is because we're seeing air travel revert back to where it was beforehand. This year, it's now expected that world traffic globally will be about roughly 95% of 2019, with a full recovery in both Latin American and North American airports, and by next year, globally, we expect to be above where we were in 2019. So that happened a bit faster. Traffic generally grows at airports about 1.3, 1.4 times GDP, as consumers get up the wealth curve, so that's why it's a great place to invest and there’s great operational leverage in investing in airports and roads. One of the interesting things about roads where we've seen traffic recover, again, is the fact that we're seeing now more public-private partnerships in the US, that's where the government is using the private sector to invest on roads. So, we think there's great opportunities going forward and some of the companies we've invested in are taking advantage of that and see those opportunities growing. One of the sectors that have not performed as well as we would have expected is on the utility side. We're investing a lot on the renewable energy space. And there's been a lot of talk about renewable energy and climate change worldwide, and really, we're doing it because we think we can make good economic returns by it. The cost of solar and wind has come down tremendously over the past decade, and now are on a par if not cheaper than other carbon emitted alternatives. And we're seeing the growth there. Last year, for example, in the United States, wind share of US electricity was about 10.2% - up 100 basis points year over year - solar share was about 4.8% - up 80 basis points year over year. Globally, there's a record 532 billion of new investments in renewable energy in 2022, up 13%. We're seeing that growth and opportunity, that sector we think has not performed as well this year because of higher interest rates. But we think going forward, it's a great place to invest and we've seen governments allocate a tremendous amount of money to the renewable sector. So, that sector we're looking to take advantage of. Moving on, on the communication sector, and as I mentioned we invest in the wireless towers, and the wireless towers in the US that underperform are towers outside of the US that’s really outperformed. And that's because a lot of the towers outside of the US has an inflation protection component to it and they've been growing. Data’s been growing 30 to 40% per year and, as we move from 4G to 5G, the tower sector becomes an integral part of that. We've seen data grow 62x since 2011, and 5G is going to allow that runway to be extended. So, we think the tower sector is a great place to invest going forward.

Paul: Josh, thank you very much for that overview. Staying on the topic of sectors if I could, Eric, what opportunities are you seeing in the private markets and maybe specifically that are relevant to ASGI?

Eric: Great question, Paul. You know, I think we think of think of the opportunity set more on the more on the lines of themes than sectors, but these themes often impact specific sectors. Some of these themes are well known or in the news and I think there's a good reason for that. You know, energy transition is happening around us, it's been happening for a decade, and it will happen for decades to come. And we focus both on the renewable side of it energy transition, some of which is often subsidised in part through the Inflation Reduction Act, but also the emissions reduction of the implementation of efficient natural gas assets, which tend not to be subsidised. We believe that natural gas infrastructure will continue to be part of our energy economy for decades to come and welcomes investment in the private markets today. On the renewable side, again, we tend to focus on long-term contracted assets, both of utilities but also corporate off-takers - often in solar, where we have a couple investments; wind; hydro; and storage. Shifting to themes, though, somewhere we like to keep an eye on is population and, in short, population shifts to the sunbelt. You know, this is something that we see both in in terms of infrastructure, and, in short, waste management and utility infrastructure, but also the energy generation needed as this population moves. And then there's one theme that I think impacts across the entire economy that really has come to the fore just in the last couple of months. You know, when I'm talking to management teams, yes, inflation rates have been, you know, have been significantly higher for over a year now. But now is the point that I think we're really starting to see the long-term effects of those in the infrastructure space. In short, there's a lot of good companies out there but in the past, when interest rates were lower, they might have gone to the debt markets. Now, if they're paying 6,7,8 percent, depending on the type of debt they're looking at, it might make sense for them to just say, you know, what, we prefer the flexibility of capital raising in the equity markets. And that's where ASGI, and our friends elsewhere in the private markets really have opportunities. So, we look forward to both these industry themes and the sector themes in the months to come and really look forward to targeting this 25% NAV of private investment from ASGI.

Paul: Great, Eric, thank you for that. So final question, Josh, I’m going to pivot back to you if I could?  Two-part question for you. First, would you mind sharing your thoughts on why investors listening today should perhaps consider allocating to the infrastructure space, and second part would be, of course, where appropriate, to the abrdn Global Infrastructure Income Fund?

Josh: So, let's start with the first one. So, there are several drivers for infrastructure today. Drivers include the need to spend on infrastructure repair - every several years the American Society of Civil Engineers gives the US a report card, and the last report card we got on infrastructure was a C-. It's estimated we'll need to spend $2.6 trillion dollars to just improve our infrastructure by 2029 to address infrastructure shortfall. So, we need to repair here and develop markets, emerging markets are building the infrastructure for the first time. And a lot of that is due to population growth and urbanization - over the past 50 years of world population has doubled; the number of people living in cities have tripled over that time period; over the next 30 years, the world's population is expected to grow by a little over 20%, but the number of people living in cities is going to grow by almost 50%. And the majority of that population growth and urbanisation is expected to happen in emerging markets. All the people are going to need roads, and airports, and ports, and subways, and utilities, and wireless towers and want to communicate and grow. So, we need to spend on infrastructure and that's what we're trying to capture. As well as other themes that I've already mentioned, such as energy transition, and the amount of money we need to spend on renewable energy, as well as changes in technology, such as moving from 4G to 5G. So, there's really a lot of catalysts for infrastructure spending overall, and we think there's great opportunities over the next decade or two decades to invest and capitalise on those investments in infrastructure. Now I know a lot of closed-end funds have traded historically with discounts, but ASGI was launched as a different type of closed-end fund where it actually has a term. So, after the term limit, when it comes close to expired, investors have the opportunity to redeem at NAV. So, that discount should close over time, unlike other closed-end funds, where there's not that end of life to it, and it trades as perpetual funds. So, we think that this structure is an ideal way to invest in infrastructure, capture a yield and hopefully get a good total return as well.

Paul: Josh, Eric, it's been great speaking with you today. We appreciate you sharing your insights.

Josh: Thank you. Thanks for having us ball.

Eric: Yeah, thanks, Paul.

Paul: So, for those interested in learning more about the abrdn Global Infrastructure Income Fund (ticker- ASGI), please visit us at abrdn.com. that's abrdn.com. Email us at investor.relations@abrdn.com or call 1-800-522-5465. Gentlemen, thanks again.

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