Aaron Filbeck (10:13)

I sure did.

John Bowman (10:14)

Did you have like a go to or did you play with folks that always had those annoying first couple questions that were always where they started and do you remember what some of them might be?

Aaron Filbeck (10:24)

I don't remember what they were, but yes, I never had any go tos. I just let the annoying people talk.

John Bowman (10:28)

Okay, well I had annoying ones like does it fit in your house or does it fit in a bread box? I don't even know where that came from. We don't even use bread boxes anymore. But another one that was used was is it inanimate? Meaning is alive. And so I'll ask you this, if I'm playing 20 questions with you and I'm trying to make you guess infrastructure and you say is it inanimate? How do you think I should respond to that?

Aaron Filbeck (10:52)

I feel like this is a trick question, John. Well, it is, I guess I would say it is alive in a way.

John Bowman (10:59)

Well that's a perfect answer. Well, yeah, See decanters, we don't script this. But here's the trouble and it goes back to that paradox I started with. These are obviously flat non living pieces of construction in many ways, but in other ways they are the most organic life giving of almost any asset or security out there. And that is the trick and the challenge of analyzing this because they have tentacles to my systems thinking point that touch almost everything these days. So There you go, 20 questions, advice for free. All right, so history. Aaron, you might remember that in our asset based liability or asset backed loans episode I took you all the way back to Gilgamesh, Sargon the Great. Remember those? I know you probably wrote these down.

Aaron Filbeck (11:49)

I do remember that.

John Bowman (11:51)

You'll be delighted to know I'm not going to go that far back today.

Aaron Filbeck (11:54)

I'm impressed.

John Bowman (11:55)

In fact we're only going to go a few centuries BC this time. So we're going to start just a few minutes ago. And did you know Aaron, that the idea of a general partner GP was effectively born in the Roman Republic? I didn't know this.

Aaron Filbeck (12:10)

I didn't know that. Fascinating.

John Bowman (12:12)

Well just as a reminder, the Roman Republic existed for largely the last five centuries BC before the Romans, massive expansion across the Mediterranean and a lot of the internal power struggles that ultimately led to the rise of what we call the Roman empire which started 27 BC. So this is the period where you had elected democracy and senators at least by name, pre emperor, but long before that power struggle, the Senate and the consuls would utilize a class of private contractors named publicani. And these publicans reached their height in the 2nd and 1st century BC just before the transition to the empires. And these publicans were entrepreneurs who ran business entities called societas which are similar to modern day limited liability partnership structures. And so again these are civilians, they're not elected officials. They're at least not technically or formally associated with the government. But they played a major role through these partnerships. They set up with the economic expansion of Rome as they would raise capital from investors and then they would fund, maintain and operate government infrastructure projects. So they would bid on These they would get awarded and they would do all the funding and operating. And these were projects you'd expect in the ancient world. Aqueducts, ports, bridges, roads, temples and mines and so forth. So it's fair to say, Aaron, that the publicani also needed a new head of PR to render back to an old episode on private equity. These were not, let's just say, the most virtuous and admired neighbors. They often exploited citizens and the tax and the tithe collection, and they use corrupt practices for gain. And I actually thought that was interesting. So in the gospels of the Bible, Jesus's parable, the famous parable of the Pharisee and the tax collector, the Hebrew of tax collector is most likely a publican. So again, this is like the dregs of society, the despised class that was coming for your checkbook in many ways.

Aaron Filbeck (14:09)

Do they charge 2 and 20 or II and XX?

John Bowman (14:12)

Well, I'm going to get to that. Yeah, they had earlier forms of carry. They absolutely did. So again, the publicani, they weren't senators or the wealthy class, but they became the true private capital backbone of the Roman Republic. They served as their government infrastructure investment arm. Yes, there were backroom winks and there was a whole lot of self dealing and it was conflict ridden. But this was a very powerful force and source of capital formation. So this is a story as old as human civilization. The state wields and weaponizes infrastructure, capital from the very beginning to, yes, on the one hand, create civic fulfillment and loyalty, but also to solidify power, economic trade routes, geographic expansion. It's about sustainability of your grip of control, resilience of your system. Infrastructure has always served as one of the most influential instruments of control for city states and empires, and as we'll talk about in a bit, even modern countries. So around the same time, in the 5th century BC in China, same thing happened. The Han dynasty raised funds through imperial grain taxes and constricted organized labor to connect a series of waterways, lakes and marshes into what would ultimately become the longest water route in the world, the Grand Canal. So yes, the state narrative was of course to create a transport backbone to link north and South China, to improve food availability, to reduce inequality, to expand trade. Yes, yes, yes, okay. But just as importantly, it served to resupply the dynastic armies and the northern frontiers, to keep rebellions and conflict under their thumb. So once again, here, the infrastructure investment significantly reduced the probability of regime collapse. It was about stability and status just as much as economic and civic equality. So finally, just to complete our first chapter here, the Wealthy ancient Greek civilization often funded public work projects such as shipyards, ports and government buildings as part of their civic duty. This was part of the ethos of being part of the Greek citizenship and playing your role. Of course, in return they received prestige, preferential treatment on taxes and trades of their own business. So this wasn't complete charity, but nonetheless, again, it was private fundraising for state planned infrastructure. So from the very beginning of time, infrastructure has been about aligning scarce private capital with public priorities and outcomes. And these are long dated and very tangible, sometimes trophy assets that create a blurring of public and private enterprise and are an indispensable lever in nation building. And as I've already hinted, Aaron, if you think this is just ancient lore, stay tuned. Sounds a little like BlackRock stepping in just last year at the behest of the Trump administration to buy port operations at the Panama Canal from Hong Kong base Hutchison. So park that for a few minutes. But again, we've seen this movie before. So at the turn of the 20th century, as we enter more modern history, the Gilded Age of course was in full swing. In the US Globalization had left the nest and America begun challenging Britain as the world's economic superpower. The approaching Industrial revolution demanded far more capital and real asset investment at a scale governments simply could no longer provide. And the Pre World War I empires in Britain and Russia financed railways, banking, telegraph networks in America and India, again to control colonies to reinforce imperial defense. The Russians, for example, built a massive linked railway system to move the czarist army more quickly to frontiers. And the Treasuries, because it was all state funded of these waning 17th and 18th century empires, of course we know in retrospect this was kind of the ninth inning of these big empires. These Treasuries were being disproportionately devoted to maritime and ground transport systems. So they were having real trouble supporting all of these infrastructure needs. But in the US we see this turn. Something different was happening that I think pulls back from those ancient times that would pretend a century long transition because markets and capitalism begun to fill this funding gap. In America, that at least first was mainly through the rise of what we call the robber barons. It was oil's John Rockefeller, finances JP Morgan and Andrew Mellon, railroads Cornelius Vanderbilt and Jay Gould, and steel's Andrew Carnegie. These captains of industry, as they've sometimes been called their super wealthy industrialists, as they were sometimes coined, they effectively ran the first family merchant banks that finance America's entry onto that global stage. You also saw the introduction of Railway bonds and public equity were introduced in this age, launching a new age of private and public cooperation and participation amongst the public in some of this infrastructure build. So rail, canal networks, power grids, telecommunications, the automobile gave rise to concentration of commerce and modern cities interconnected trade. It fostered massive migration patterns. It really rewired developed nations and reset the global world order. So once again we see this inescapable codependency we mentioned in my intro. Infrastructure may be financed mostly through private means, but its consequences are always public. So the deployment of these massive pools of private capital into America's foundational infrastructure also however created a series of monopolistic trusts, allowing for outsized political influence, unsavory competitive work practices. Until my guy, good old Teddy Roosevelt began loosening their grip, stepping in with new regulations. So again, I just got to give a shout out to Teddy whenever I can on the show. So as we mentioned earlier, infrastructure's natural habitat sits at this intersection of private capital formation and state outcomes. It is confusingly, interestingly, almost always quasi public and quasi private. But the sub theme here in this case around the robber, Barron's and Teddy Roosevelt is that when that symbiotic relationship begins to stress one way or another, when the tension begins skewing, when that tug of war starts shifting, history teaches us that we tend to get a return to balance. Whether that's nationalization, privatization, embargoes, fines, other forms of economic controls, a reversion to equilibrium always seems to come. And that's something to remember as we think through infrastructure's maturity now. Aaron in the capital decanted audiomatic universe, if you think about all the episodes we've previously hit, coming of age stories like venture capital, private equity, private credit. Now to put the early green shoots of infrastructure institutional investing into perspective, you might remember if you've been listening to the show that the first VC investment, Fairchild Semiconductor was 1957. The first private equity LBO deal or can pest control we put at 1964. The first sub investment grade non bank credit of course came through Michael Milken's innovations in the late 70s. So infrastructure as a result may be the oldest investment in human history, but it is a very new institutional asset class by comparison. In fact, even the word infrastructure was bewildering and largely rejected in the 50s. For example, good old Winston Churchill himself scoped at a presentation famously of a post World War II quote Infrastructure European military preparedness presentation. And he stated quote knowing well there is no such word as infrastructure. I must reserve my comments until I have consulted a dictionary end quote, leave it to Churchill. So, semantics aside, the transformation from bespoke public private cooperation through the centuries as we've been discussing, to what you might call an industry of professionally managed infrastructure funds was not born shockingly until the early 90s. And perhaps surprisingly, as I said a moment ago, in Australia, the birth of infrastructure as a true asset class, and what I mean by that is long dated pooled fiduciary regulated capital was a function of a set of coincidental conditions in Australia in 91 through 93 that created the perfect environment to begin closing this infrastructure gap we've been outlining through history. So what were those three conditions? First, in 1992, the government under Prime Minister Paul Keating introduced the superannuation system to create professionally managed, compulsory self funded retirement systems. Now the super system today is probably the most admired retirement scheme in the world. In fact, as you know Aaron, just last month we talked quite a bit about the model it serves as the U.S. considers a more diversified and modern D.C. state pension system. But unlike most pools of capital in the 90s that were almost all plain vanilla 6040, the supers were born and drawn to real assets from the very beginning. Due to the long dated nature, the stable cash flows, the built in inflation hedges I mentioned earlier, these were attributes that were very appealing for asset liability matching of course, so the supers were hungry to put capital to work in these types of asset classes. But the problem with just that first condition in isolation was that the infrastructure was owned by the Australian government, at least up until that point. So the second condition is that all begun to change in the early 90s as both the federal government and many of the states face financial difficulties and had to begin shedding assets. So I should mention here that Australia as a federal country means there is not all that different from the us. That there is significant collaboration and codependency in infrastructure between the states who lead planning, project management, spending for infrastructure, and the Federal government who oversees regulation and often contributes heavily to capital investment. And further, culturally, Australia more than the west very early had this cooperative spirit of PPP or public and private partnerships. Those of us in the west are probably conditioned to think about the combative competitive nature of government and industry. But this is, was not and is not the case from the very early days in Australia. So there was this warm synergistic relationship between the federal government, the states and private sources of capital that were conducive to this necessary transformation. So as I said, the government begun privatizing energy Transport, communication sectors to help right size their own balance sheets that were under stress. And Victoria for example, privatized their electrical grid and the federal government sold off the airport network. So you had this vast pools of capital intrigued the supers by the risk return characteristics of infrastructure. And now you had assets being put on the market and up for bid under duress. Yes, but these were national champion essential services type assets. But you were still missing. As I said, there were three conditions. One piece of the puzzle that created this perfect set of circumstances for the origin story. You needed an intermediary, an entity that was versed in securitization, capital formation, asset operations of these idiosyncratic big heavy assets. And so that leads me to the third and the final condition. And that's where Macquarie enters the story. Macquarie of course had been an Australian fixture of the financial services industry in Australia since the late 60s. It had a range of burgundy divisions and businesses in cash management, stockbroking M and a merchant, banking, retail and interestingly had a little tax group that helped with project construction finance. Now I should note here that this little commercial break, this sub phase of the story is partly taken from an excellent recent interview from our friends at the Wall Street Skinny with Mike Durrell who is the co founder and CEO of Stone Peak. Stone Peak is now one of the largest dedicated infrastructure GPS in the world with about 84 billion under management. But Michael was on the ground floor at Macquarie in this petri dish I'm about to describe. So he had a really good insights into how this all took shape. So I mentioned this little quote, tax group in Macquarie. Why tax? That doesn't sound very relevant. Well, this ragtag group, that was exactly the phrase that Michael used to describe them. They were experts, interestingly on the accounting treatment of heavy assets like airports, power stations, airlines, even airplanes, and specifically how to maximize depreciation schemes on the books. And as such, when the government, as I said, started offering these assets for sale, not only was there really no other competition around, but Macquarie had this built in competency in this little tax group to create very favorable financing and an informed valuation on how this would sit and grow on their books. But complicating the barriers to entry, even for Macquarie, was the fact that there was no private or public capital facility or mechanism to finance these purchases. So they were ready. They had a sense of what these assets were worth. They certainly had a sense for the model by which how they could extract value. And they I think had a good sense as to the long term risk return characteristics but how were they going to finance these purchases? They didn't have a big balance sheet, they weren't well capitalized, there was no private equity market in Australia to speak of. And debt financing, both corporate and project finance even today, by the way, are comparatively immature compared to the US and Europe. So Macquarie needed to get very creative to build this market really from scratch. So in this strange twist of fate, and I found this fascinating, they begun listing publicly traded vehicles on the Australian Security Exchange with the sole intent of using those raised funds to bid on those government infrastructure assets that went up for sale. So Aaron, let me repeat that a slightly different way and see if you pick up on what I'm getting at. These are listed blind pools, meaning when you invest in them, you don't know what they're going to be used for yet, and they have tradable accessible shares to participate in whatever said security intends to buy. What does that sound like?

Aaron Filbeck (27:45)

I don't know, but it sounds like a spectacular idea.

John Bowman (27:48)

It certainly does. The earliest infrastructure SPACs. It's so funny how history does repeat itself, not just rhyme. So in 1994, Macquarie arranged the financing for the M2 motorway in New South Wales. This is a 20 kilometer toll road in Syd. The Hills Motorway Trust, as it was called, was the first single asset property vehicle listed on the exchange. And they would charge carried interest on the performance of the publicly traded vehicle. They had management fees and then they also took M and A and regulatory advisory fees. So this smelled a bit, it certainly charged a bit like a single asset drawdown fund, but it had daily liquidity and the supers in particular loved it as they didn't have to operate the assets, but they could get daily easy liquid exposure to high quality assets with of course cash flows. As I mentioned, that mimicked their pension payouts. So that little rabble tax group, through the experimentation, innovation and financing through these public vehicles, would go on to be Macquarie Capital and single handedly, literally launched the global infrastructure investment business that we know today. So the global market is about to open up, particularly in Canada. And I think it's important to underscore some of the unique characteristics of these circumstances that still echo in the infrastructure business today when you compare the super funds with the Canadian model. So in Australia, as I just described, Macquarie and eventually other specialty Australia infrastructure gps, Hastings amp, qic, First Capital, by the way, the supers even seeded and still own a dedicated infrastructure GP called IFM. So that you saw this proliferation of other GPs, it kicked off this embryonic development that created this ecosystem of LP and GP history that has endured to this day in Canada. However, in the early and mid-90s CPP teachers and some of the other early Maple 8 begun building in house capabilities to be able to go direct. So this insourcing of private capital, investment talent and asset management is of course what came to be known as what we call the Canadian model. Canada innovated through direct ownership while Australia, as we discussed, innovated through financial vehicles. They were certainly both pioneers in that they saw infrastructure very early before anyone else as a distinct strategic asset allocation with unique advantages for the portfolio rather than something opportunistic or incidental. But they pursued their portfolio construction very differently. One way to put it is you could say Australia financialized infrastructure and then Canada operationalized it once confidence and governance and scale caught up. So as we move towards the modern era and handing to Aaron in the early 2000s the UK, Netherlands, Northern Europe followed suit through listing vehicles and some proto closed end funds. And by the way it was Macquarie again in their new UK business that was the catalyst here for other now huge European gps like Anton and ECUT that jumped in on the LP side. Importantly you begun to see in addition to those early public pension fund movers, sovereign wealth funds, insurance asset owners began investing in the asset class as well. Now finally, if you're listening to this carefully, you might be wondering why I haven't even mentioned the US yet. So just to be clear, that's not an accident or some suspenseful storytelling instrument where I'm about to drop the real story here. Unlike most asset classes, the US was very late and that was probably by the way due to the muni bond market that was already ubiquitous in the infrastructure space here in the US and offered tax free interest and therefore a very favorable cost of capital. So the Macquaries of the world just found the US less interesting for another couple decades and a tougher nut to crack until the mid 2000s leading up to the GFC. So similar to Australia, the original dedicated funds emerged in the US in 2006, first from the investment banks Goldman, Citi, UBS. Once again it was the bankers and the deal makers that led the charge versus seasoned investors. These were consortiums of the Energy Banker, the Project Finance Banker, the Transport Banker, the Muni Bond banker, all just trying to manufacture some momentum and fill a gap in the product suite. But it wasn't that long until those early ragtag looking entrants were soon overwhelmed by the scaling of Brookfield Global Infrastructure Partners which was founded by Ex Credit Suisse Bankers and now of course is part of BlackRock. Macquarie's new US business was entering around this time KKR was in the late 2000s and then eventually post GFC organizations like Stone Peak Blackstone began to repurpose their PE drawdown fund for purposes of institutional infrastructure investing. So that historical debt ethos of infrastructure in the US is why even post GFC infrastructure allocations remain low single digits. Well as mentioned in Australia and Canada and parts of Europe they were low double digits and mostly equity. Actually it wasn't until these pegps entered the market and commandeered their closed end private equity structures for infrastructure that you started to see this take off with US LPs. And the last thing I'll say Aaron, is that on the note of late entry of the intermediaries of the global players outside of Macquarie in the west, other asset owners in the meantime just took matters into their own hands and built a hybrid between the in source Canadian model and the intermediated Australian model. So several asset owners followed that very early IFM model from 30 years ago. They set up their own specialty GP that is either wholly owned or jointly owned to source underwrite manage their infrastructure portfolio. So Kuwait Investment Authority has the Ren house originally for European infrastructure and then eventually globally. That pension protection fund worked with the UK's National association of Pension Funds to set up the pension infrastructure platform that was for UK infrastructure purposes. Psp, another Canadian pension set up AVI alliance to invest in and manage airports throughout Europe. OMERS partnered with the likes of Japan's GPIF and Mitsubishi to create a co investment platform called the Global Strategic Investment alliance to invest in North American infrastructure. So those are just a few examples and going to be really interesting to watch how these more modern asset owner structures become more common as infrastructure. I think as you've seen has infiltrated both our hearts but has moved well beyond those muddling core categories of the distant past.

Aaron Filbeck (33:59)

So John, before I move on to the more recent history, I think it might be worth hearing from Peter who had a nice summary of what you just covered and gives a nice preview for what I'm about to cover. He had a really clean way of framing exactly how the definition of this entire asset class has shifted and why that matters for how you build a portfolio. So let's take a listen here.

Peter Blue (34:20)

What we're seeing today is a shift in the definition of infrastructure as institutional investors look at it right, Classically it is thought of as more bottom like and higher income, but that's really a byproduct of how the asset class developed and originated over the past 20 to 30 years. So coming out of the 90s into the early 2000s, it was really more about privatization of government assets, public private partnerships, assets that did lend themselves to being a bit more conservative, highly regulated, and kind of locked in cash flows in a way. So think utilities, traditional transport assets like roads and airports and seaports, the things that most investors tend to think about when they define infrastructure. But today we're seeing a massive shift in the opportunity set for infrastructure investors. Beginning around 2010 into today, private capital has really come into the broader market, expanded the scope of what's possible. So new sectors like digital infrastructure, innovation and energy generation markets really, in some cases moving governments entirely out of the equation, which leads to different challenges as an investor when you think about space. So it's not just now a government regulated monopolistic asset. It's a few different dimensions and lenses through which you have to now look at infrastructure.

Aaron Filbeck (35:45)

There's so many parallels to today versus going back to Roman times and even just a century ago. What's old is new again, as we've been saying here over the past couple of months at Kaya. So when we move into more recent time of infrastructure. Infrastructure really faced another inflection point here. In the late 2000s and after the global financial crisis, as we all know, governments across the developed world were in a bind. So debt levels were spiking, budgets were tightened and constrained, and a lot of governments were focused on digging themselves out of the Great Recession. And their ability and will to fund infrastructure fell dramatically as a result. Now, at the same time, warnings about a looming infrastructure gap started to pile in. So while dated, there's a really good 2021 Stanford policy brief that claimed that the US alone had a projected 2.6 trillion funding gap through 2029. And more recently, McKinsey estimated the global annual investment in critical infrastructure at over US$9 trillion. So unlike the 90s, as John mentioned, when governments were shedding their assets, we're now entering a new phase where infrastructure investment was actually needed, but no dollars or political willpower was available to support it. So here's where the investors came in. If governments can't fund this, and the gap was that large, then a structural opportunity exists. Sound familiar? And that's why private credit has taken off. Oh wait, not private credit. Infrastructure.

Peter Blue (37:15)

Weird.

Aaron Filbeck (37:15)

It's like the kickstart for both origin stories started around the same time.

John Bowman (37:19)

I think though, in a lot of my research we talked about the 1.6 trillion, but I think A lot of infrastructure cap stack exposure is hidden in debt portions and credit portions of portfolios. I have a sense that because it's only recently emerged as its own asset class, we still have some legacy exposure that is probably spread across other allocations in ways that maybe underestimate. But I'd love your thoughts on that.

Aaron Filbeck (37:46)

I think that's right. I mean, you mentioned muni bonds in the 2000s. That's certainly part of the investment opportunity. Private credit as we talked about in the previous episode, infrastructure plays a really important role in the evolution of the private credit space. So how you categorize where they sit depends. I think the way that we measure this at Kaya, private credit covers both cash flow based and asset based lending, which includes infrastructure. Whereas that 1.6 is more pure play equity investment, if you will. So in all seriousness, let's talk about post GFC. So in 2008, closed end infrastructure funds manage roughly US$60 billion in assets. By 2019, that was about half a trillion in assets. And of course, as John mentioned at the beginning, by 2026, total private infrastructure AUM had reached around 1.6 trillion. So when you stack up the growth in AUM across this period, the growth is second only to venture capital among private asset classes. So infrastructure is still small in the grand scheme of things when it comes to private capital. But the 2000 and 20s might actually look like what private credit looked like to the 2000 and tens. But the story of why is important and it'll lead to a more recent evolution. Infrastructure at the time of the GFC had these distinct features that were very attractive to investors who had just experienced one of the worst drawdowns since the Great Depression. You had tangible assets providing essential services. These were things that people needed. No matter what was happening in the economy, rain or shine, they were still going to operate. You also had cash flows that were both stable and often inflation, like through regulatory frameworks or long term contracts. And then finally, these assets had monopolistic or near monopolistic market positions, meaning very little competition in terms of operations. So for investors emerging from the financial crisis, what a relief. You could buy something that felt like a bond, delivered stability and downside protection in recessions, but with a return profile that was closer to stocks. And during market environments that were volatile, low interest rates and so on. That combination was increasingly hard to find. And for the most part this experience was realized for a lot of investors. Private infrastructure funds delivered strong returns through the 2010s, with returns broadly matching or exceeding other asset classes on a risk adjusted basis. And as promised, they had mark to market volatility that was closer to bonds, but return profiles that exceeded global stocks on average. And of course from a portfolio perspective, there were some diversification benefits. Correlations to public markets sat somewhere between 06 and 0.8, so real diversification benefits to allocating. And even during more recent shocks, COVID 19, the recent inflation spike, and so on, many core infrastructure assets held up better than public equities. Now, as a sidebar, if any of our Capital Decanter listeners are avid DJ Khaled listeners and fans, you'll know that one of his hit albums was called Suffering from Success, released in 2013. I actually believe this is one of John's top plate albums on Apple Music. As I was preparing for this episode, I wondered whether he was predicting the trajectory of the infrastructure asset class. Because Suffering from success is exactly what happened to infrastructure. By the early 2000s, something had accelerated in the asset class. Record fundraising and investor competition began to heat UP, and in 2021 alone, infrastructure funds raised nearly US$130 billion, which is about 55% higher than what they raised in 2016. But as a result, GPs were desperate to deploy capital, valuations were climbing and future return expectations dropped. The boring infrastructure of the 2010s Again, mature assets with stable cash flows started to look less attractive. From a risk return profile, the infrastructure industry essentially hit an inflection point. The easy, low risk, high yield deals have been taken and the low hanging fruit was gone. What was left was either more expensive mature assets or riskier, more complex ones. So a lot of investors faced a choice accept lower returns on core assets or venture into territory that looked increasingly like private equity. Well, as with most things in private markets, they chose the latter. And this is crucial because it fundamentally changed what infrastructure looks like as an asset class today.

John Bowman (41:55)

And I think this might be a good opportunity to bring Gautam back into the conversation, because we've seen this evolution in definition before. Each inflection point has added new categories, new definition. So perhaps the 2000s have presented yet another iteration of what's been happening for decades. So take a listen here.

Gautam Bandari (42:15)

Classical infrastructure was PPP. So about 18 odd years ago people would argue that airports are not infrastructure. So just to put it in context, today people say airports are core infrastructure. And the reason back then people thought airports are not classical infrastructure was because generally the beta is more than 1. So the economy is doing well. Air traffic really exceeds it. When the economy shrinks, air traffic actually Goes down quite rapidly. So the beta is more than one. And as a result people also thought that the many modes of transportation there is no guarantee. And much of your revenue is from shops and things like that. So it's not just pure tax revenue. So I think definitions have changed. What is true is that airports are resilient. I think people have seen that other than Covid, I think they have had a pretty good run. And I think as a large owner of toll roads, I would tell you despite Covid and during the pandemic and all the shocks and the supply shock and the demand shock and the inflation sh, toll roads did exceedingly well. So they broke through all that way better than a restaurant, way better than fashion or any other thing that you can think of. So I think it held up. If there was ever a lab experiment or if you wanted to do your PhD thesis on resiliency of various real assets, I think infrastructure would come out with the A grade. And it's both classical infrastructure as well as some of the newer things into infrastructure. So if you think about a school bus business which is just transporting kids to school, that some would argue is new infrastructure. But look, the way to think about it is whether the stock market goes up or down, your kids are going to go to school. So it's kind of irrelevant how the stock market does. And so I think some elements of social infrastructure in the same thing. Aging is a human process, has nothing to do with stock market. So I think it's useful sometimes to not think on those rigid lines. But I have always advocated that people think along the lines lines of resilience. Is it correlated? Is the beta low? Is it a repeatable activity that is just going to occur because there is a fundamental need in the society and not everything regulated is good. In fact, I happen to believe that regulated assets, especially in today's environment, are very political. And politics changes and politics, frankly, since Roman times or Greek times is roughly the same. So I think we have these 30 year assets we need to think about fundamentally. Are they quasi monopolistic? Are they repeatable? Do they have repeat customers? Are they habitual? Or maybe they're contractual. And as a result, I think these contracts stand the test of time. And along those lenses, I think you would find many assets have joined that fray. Of course you have the classical toll roads and airports and ports. But you can add to that assets, frankly today, such as cold chain centers, data centers, fiber optic networks. Remember back then, actually fiber optic networks didn't exist. These are C like copper rings so it's absolutely a brand new asset class that has come in. So I think all infrastructure is private capital that tends to specialize. Frankly, that's what real estate is. If you go back enough years, everything was private equity. Even real estate was private equity. Some of the early Carlisle funds actually had real estate assets in them. But over time, people specialize and that's a fantastic thing. You should specialize. You can get more alpha that way. And infrastructure happens to specialize around about five dimensions of power and utilities and transportation and digital and social. And I think within those sectors. Those sectors are quite common globally and once you specialize, you can actually take advantage of that

Aaron Filbeck (46:13)

toll. Roads, airports, seaports, electric utilities, water systems, schools and hospitals all partnered with governments and government funding. And the list goes on. Up until the early 2000s, these boring sectors were the primary engine of the asset class that dominated most of the deal flow. So yes, the stereotype was boring, but that was the point for most investors. But over the past 15 years, and especially post GFC, the definition of infrastructure has expanded dramatically. And this expansion is where most of the new capital is going today. Infrastructure has both new categories and evolutions within existing categories. What we are effectively seeing is the growth and expansion of value add and opportunistic assets on top of legacy core or core plus mandates. As a result, you've seen specialist GPs pop up to focus on these areas and traditional asset managers acquiring them, like BlackRock. In fact, BCG notes the number of acquisitions has picked up tremendously over the past several years. Companies like Amundi, BlackRock, Brookfield, GA and so on are all big names that have either entered this game for the first time and gone specialist, or they've merged with partners in order to access the market. So let's talk through a couple of the main components. First, you have conventional energy and utilities. These are the assets that form the bedrock of early infrastructure funds. Natural gas pipelines and fossil fuel power plants were once considered low risk cash cows, but now they carry transition risk as government mandates and economies shift to cleaner energy. A gas distribution network traditionally quoted as super core may need costly repurposing for alternatives like hydrogen and other alternative sources of energy, pushing it into a higher risk category. Power transmission and distribution grids remain essential and regulated, but they also require massive capital for renewable integration and electrification. Oh, and there's always regulatory uncertainty. Second are transportation and logistics, which remain core portfolio elements. Toll, roads, airports and seaports. But COVID 19 really revealed something important. While long term demand is robust, these assets can see significant short term volatility during tough economic environments. For example, an airport's revenue can crater on airline schedule changes and so on. Yet there's still an enormous infrastructure maintenance and repair work that's needed in a lot of these different assets. For example, According to BlackRock, U.S. bridges will require nearly 375 billion in repairs over the next decade. About half of Japan's roads and tunnels will soon be over 50 years old. And nearly 20% of England's water supply is lost to leaks. So this represents a substantial opportunity for investors in brownfield upgrades and reinvestment. The need for investment is about keeping the traditional backbone of our economy functional in this sector. And these are fundamental to economic growth, but even maybe more fundamental for job creation. Third is social infrastructure. So here we're talking about hospitals, schools, affordable housing and so on. And those continue to provide stability for investors and they're often supported by government funding. But here too is an evolution. The private sector's role has grown through programs such as the UK's Private Finance Initiative and then of course public private partnerships in areas like Canada and Australia. So these assets offer modest bond like returns on top of societal benefits. So you tend to see a lot more public plan involvement here. Now, digital infrastructure is one of the first bolt on categories here. We're talking about telecom towers, fiber Networks, data centers, 5G systems, all of which were once considered niche and technology driven in projects on the margin of quote unquote real infrastructure. But today they're effectively the new utilities. Explosive data usage and cloud services have made digital connectivity as critical as water or power. The demand is also inelastic because we actually need them to function day to day. Therefore, assets like telecom towers and fiber networks have migrated from the quote core category up to core or even super core because their cash flows have become much more predictable. Whereas categories like data centers and AI infrastructure are the new frontier. And roughly one third of new infrastructure funds have targeted some form of digital or renewable. As I'll talk about in a second, and this has become very central to the asset class. As an aside, there was a really interesting study about highways. So John, did you know that from 1950 to 1989 roughly 25% of the increase in American economic productivity was attributable to to the investment in the national highway system. So perhaps data centers are the new highway of the 21st century.

John Bowman (50:44)

I see what you did there. You do bring up a good point, however, in that some of these transformational investments in the economy can create productivity. We take highways for granted now, of course, but back then it required a ton of capex, really strong execution to get that productivity jump. I think the same could be said for data centers. So Peter had some specific thoughts on how you actually might evaluate one of these deals and where new entrants tend to get tripped up. So let's take a listen to him.

Peter Blue (51:13)

Digital and data centers in particular, a ton of capital formation happening there, a ton of capex. Obviously there's the AI headlines every day that seem to whips all sentiment. So it's critically important to have a process in place to look at these assets and decide what the risks are and then what the return opportunities are and also where it fits in a portfolio. So I think it's still important to look at data center projects specifically in terms of brownfield versus greenfield risks. Are they operating? Do they have locked in cash flows, are they stabilized in that sense? And if you bucket it in that brownfield category, it's easier to wrap your head around. It becomes more core, core plus and you kind of go about validating those assumptions and digging into the cash flow stability. Greenfield will entail a bit more development expansion, CapEx growth orientation. It could be greenfield from the shovel in the ground, but it could be more brownfield expansion which will tack on some greenfield efforts to expand the platform, do new development off of it. So I think you still have to look at those two categories of risks, which will entail different risk return profiles. But for digital and data centers in particular, there's probably three more that come to mind as particularly relevant. So execution risk is critical in the data center space, particularly for new developments. And the big thing there is, is the power secured? Is it locked in? Is there a path to grid connection? Or if not, is there a path to a behind the meter solution where a project and a power generation capability could be stood up just for your development? So is the power secured? Do you have local community and stakeholder buy in? You know, that's a big one. Just the local, not even the regulators. But in a world of NIMBYism and making sure neighborhoods and community leaders appreciate what you're doing and that you're doing in a way that's thoughtful and ultimately beneficial to the community, that's important and then beyond that, just the supply chain requirements to execute on the labor, construction materials, et cetera. So execution risk is a big one. That's one area that as an aside, where we suspect many new entrants to the data center space will kind of trip up because it's one Thing to have a piece of land and get that ready and permitted for a data center. And that's critical as a starting point. But without the power, without the ability to build, without the community buy in, it becomes tough. The second one is offtake becomes a little bit trickier and different in the data center space. So who is on the other side of the long term contracts that the data centers want to put in place? Whether that's with hyperscalers who have locked in 10 to 15 year contracts to use the data center compute, whether that's enterprise corporate entities, what is the model? Is it a colocation model? Is it more of a NEO cloud model? So understanding the nature of who's on the other end of the contract is pretty important. And that kind of leads me in the next one of technology risk as the third consideration to really think through. Because the nature of the businesses of a lot of the off takers is changing quickly. Whether it's AI and the hyperscalers and their ability to scale CapEx and monetize or whether it's just the need for cloud at the enterprise level, there's rapid shifts in that type of demand profile. So when you're underwriting the data center, the key things that come to mind are, is the risk of retrofit underwritten understood new capex, is that built into the financial plan? If the data center needs to change its setup and specs for a different type of buyer halfway through its life, what would that entail? And then what happens if counterparties need to be switched out? If one hyperscaler loses market share and another one gains, Is that easy to do? Is it easy to make the contracts fungible based on what you're able to provide to the market from a technology and compute perspective? So I think the key thing there, to summarize it, is the addition to the ability to execute and actually bring the data center online and secure offtake. It's important to have optionality in what the data center can do and how it can accommodate different types of technology.

Aaron Filbeck (55:25)

And finally is renewable energy and clean power the second bolt on category if you will. So these include wind and solar farms, battery storage, emerging sectors like hydrogen or EV, charging networks. And a decade ago these projects depended on the government and were viewed as more venture capital like in their risk profile. Now today it's central to infrastructure investment. Clean energy has shifted from subsidy dependent to market competitive in many regions. More importantly, the scale of need is enormous. On the order of about $9 trillion per year in physical assets just for energy Transition alone globally through 2050. And that imperative has spurred dedicated energy transition funds and increased capital allocation to higher risk greenfield projects for new developments like offshore wind storage, grid upgrades, and other things that governments are unable or unwilling to fund alone. And the key point is this infrastructure is no longer a homogenous category. It ranges from ultra stable regulated utilities on one end to greenfield renewable projects on the other. And this means that investors now need to think about infrastructure and the way they think about equity markets, private equity, private credit, and so on. Much more targeted with sector differentiation and different risk profiles, those two final categories that I mentioned. So digital and renewables now represent about a third of all fundraising, up from 0% 20 years ago. So I'll leave you with this and that. These shifts may experience interruptions year to year. The riskier segments will see fits and starts based on macroeconomic or geopolitical backdrops or other disruptions to the economy. So, for example, the interest rate and inflation cycle across the past couple of years actually saw a bit of a reversal in some of those categories that were being invested in. So many of the investors focused on lower risk core assets at the expense of some of those high risk assets as well. So we're likely to see, even though there's this secular trend of expanding the definitions and where fundraising takes place, there is still a balancing act of kind of the old core boring stuff. That infrastructure is historically represented with some of the more future focused elements as well. But a lot of this goes with that macro backdrop that's driving some of that fundraising.

John Bowman (57:35)

Yeah, I think your last point on the newer age categories, get back to my talent point, is that if you think about the origins of the core and even the types of people in the Australia age and even as it entered Canada, these were bankers, as I said, these were deal makers, they were corporate finance structure experts. And that I think, endured for a lot of these ages of bridges and roads and airports and seaports. But now you're having to bring in your view of technology and your view of AI and its ubiquitous implications. You can hear the sucking sound of these new AI data centers out of the energy grid. So there is climate and energy and power implications to all of this. And so it is forcing. Again, I come back to what I said earlier. More pressure on talent diversification in this asset class than perhaps any other asset class I can think of in its evolution.

Aaron Filbeck (58:38)

I would agree. And to your earliest point on systems thinking and the interaction with society and the public, I mean, you've got to bring all these different Types of skill sets and talent to the table in order for this to be successful. It's not just a financing conversation. I like the Australians did the financialization infrastructure and the Canadians operationalized it. And then I think the extension of that is some of the stuff we're talking about here and technology and climate and it's all kind of related to one another.

John Bowman (59:04)

I think also before we move on, it's important to pause and think through this market sizing because I think there's some unique elements to this that as I alluded to earlier, massively understates the opportunity here. So let's just talk about some of the numbers we've already mentioned. I said 1.6 trillion, that's investable assets of the 130 trillion. So it's a fraction of the total pie. It's 6% of the alternatives portion of that pie. We talked about this 100 trillion ish of need over the next 15 years. So I think you can extrapolate that and say obviously the existing valuation of all the infrastructure in the world is a multiple of that. I mean you start to think through these numbers and they're overwhelmingly big, perhaps bigger, maybe not even perhaps, obviously bigger than any other asset class or asset portfolio, at least the securitized versions. So if you think about that 1.6 trillion and 100 trillion to come in the next 15 years, even if a small fraction of what historically was largely government public owned shifts a little bit, you're talking about that increasing several fold and it's got to be financed somewhere. So I think there's almost a logarithmic effect on this whole move, particularly if PPP types of financing structures are involved. And I don't even know how to think about where that 1.6 trillion should or could go given the requirement for a lot more private capital to be at play.

Aaron Filbeck (60:32)

Totally. And it's not a perfect analogy, but when you look at real estate, there's a huge segment of the real estate complex that's non investable and it's not accessed by the institutional market. They're either owned by individuals or government owned or whatever the case might be. And so I think it's the same thing with infrastructure and maybe it's just different funding sources. But the muni bond market is still massive here in the States you might have corporate ownership of infrastructure, but how this gets solved I think ultimately benefits society, but who actually accesses it is a bigger question. But you're right, even a small portion of the hundred trillion would grow the private Capital segment exponentially.

John Bowman (61:11)

So there's another layer here, back to our point on what's old is new again that we need to revisit. And I was teasing this out into my history and goodness, you'd have to be living under a rock not to notice the collision, perhaps recollision of geopolitics and infrastructure in recent years. You remember that earlier the defining theme of the Romans, the Chinese, the British and even the 20th century American regimes were to wield and weaponize is what I said. Infrastructure, capital to solidify power, economic trade routes, geographic expansion. This was colonization, imperialism at its best. And you said it too. Guess what? Well, it is back with a vengeance and it is morphed into an even more modern and intensive brand of statecraft. Infrastructure is no longer just an investment category that it kind of existed largely for a few decades, but a geopolitical arena that embeds itself in the very foundational functioning of a nation. And as we've seen, things like reshoring of supply chains, climate change, shortages of rare earth minerals, concentration of critical technology, manufacturing, proliferation of cyberspine, or at least the fear thereof. Infrastructure assets, while innocuous and dull. I know you don't like when I say that, Aaron. At the surface they have become strategic instruments of influence. In reality, so control of ports and canals and key trade, waterways, energy grids, telecommunication networks, even social media platforms, data centers. They're no longer just about financial returns. They are now a significant theater, you might say, of national security and geo worldviews. And this has led to much more scrutiny of foreign ownership, competing mega development finance initiatives and a redefinition of what is trusted capital. So it's also kicked off a race of who can strike the best. Long term trade deals lock in key commodity access control, safe and efficient commerce movement. Private industry now ironically has become both a pawn and a power broker in this game of risk that is playing out on a real life stage. There was this brilliant piece in Foreign affairs by a columnist named Mary Bridges that put it this way. She said, quote, falling water levels in Panama's Gatun Lake, A cyber attack on a payment platform, an earthquake disrupting silicon chip production in Taiwan, Elon Musk deciding which countries have access to the Internet. At first glance, these things have nothing in common other than their recent prominence in news headlines. But an invisible through line connects them. Each one highlights modern society's dependence on complex infrastructure to function. Disruptions in the Panama Canal can delay the delivery of critical shipments around the world. Computer failures can interrupt routine medical care Provided by clinics across the US A brief halt in the production of semiconductors causes panic, and a billionaire's whim can turn the tide of war. She goes on. The complex hardwiring and technological dependence of modern life have made people reliant on a wide array of infrastructure systems. And governments now compete to create and maintain the networks that deliver essential services, from electricity to clean water to telecommunications. A country's power emphasis of my own here hinges on its ability to influence and manage this vast set of systems. In this infrastructure dominated world, governments and their officials no longer maintain unilateral control over international relations. Instead, corporations, technology, and environmental conditions combine and interact with governments to shape the world order. And she concludes with this. In the age of infrastructure, shaping world order requires political leaders to find new ways to collaborate with the entrepreneurs, the builders, the bankers, and the operators who manage the interdependent systems that sustain 21st century life. This infrastructural turn in geopolitics has revealed that the world has a new set of power brokers. End quote. And I think that sums up exactly what's happening at the heart of this rebrand. Of course, that probably comes to mind as you hear me reading that quote, is this bilateral competition between China and the us, this tit for tat that we're seeing play out in control of the world's infrastructure. And in some ways, it is the exemplification of the trajectory of this whole episode, Aaron. And it best captures today's calculating, you might say, mano a mano, almost Machiavellian chess match of infrastructure statecraft. So we touched on this a bit in the China episode, so I won't belabor it, but after Xi Jinping's ascension to paramount leader in 2013, he announced what would become his centerpiece foreign policy effort, a global infrastructure development strategy called the Belt and Road Initiative, bri. And it aims the BRI, according to the prc, to strengthen their global standing and influence through expanding the foreign presence of Chinese state firms, creating new markets for PRC goods, and securing access to strategic commodities for their economic development. But let's not be fooled by the economic sheen here. This is debt and influence diplomacy at its finest. Exactly what we're talking about. Through BRI investments, the PRC is generating new international trade routes, technology standards based on Chinese technology, and expanding military access to BRI infrastructure. So in financing and building power generators or industrial parks or railways, for example, they're able to exert much more control over critical and threatened portions of their supply chain, tighten their grip on suppliers Huawei, the telecom behemoth, can ride this BRI wave to establish a more ubiquitous footprint based on PRC technical standards, which as we all know is a rival to the Western standards of telecommunication. And of course the financing and management of ports are a critical and useful trophy to the People's Liberation army if they need it to project military power and acquire intelligence capabilities. So an opinion piece in the Hill put it this way, quote. China's strategy today is as much about norm setting as it is about nation building. It exports standards, embed surveillance tech retools the political grammar of aid. A power plant might come with a data sharing clause. A port might double as a security outpost. In East Africa, Chinese built telecom backbones now carry not just bandwidth but also dependency. In Indonesia, mangrove preservation is coupled with carbon offset markets tied to Chinese firms. The lines between sustainability, surveillance and statecraft are increasingly blurred. End quote. So the recent figures I've seen, by the way, these are from authoritative report from what's called the U.S. government Accountability Office or GAO, show that this was staggering to me. China has deployed over 700 billion US of global infrastructure financing since 2013 to over 150 countries through this BRI initiative. There was another source that had this amount over 1 trillion by the way. So pick your point in that gap. Either way you're talking about eight to 10 times what the US has spent in that same time period, which is around 80 to 90 billion with a B, not a trillion. So a big reason for that difference we should reinforce again that we did on the Chinese episode is between long term central planning which is an inherent advantage the PRC has over the US given our short term election cycles, gridlocked partisan dynamics. You see this play out in America's decrepit airport. You travel it all electrical grid network in proposed innovative products like the California high speed rail that very quickly gets bogged down in permitting bureaucracy political grandstanding. Again election changes. But I think relatedly the 80 or so billion that I just mentioned that the US has spent in comparison, it is split and hyper fragmented between various government agencies that all have constraints, limits and deeply aged regulatory frameworks. So usaid, Department of Commerce, Export Import Bank, Development Finance Corp. Or DFC, U.S. trade and Development Agency and even some of the states individually. So is there is at least as far as I can tell, very little coordination, certainly no defining long term worldview or vision that is linking these like the BRI has in China. Now I should mention to be fair, the Biden administration along with some other G7 supporting countries announced something called the Partnership for global infrastructure or PGI. And it was a thinly veiled, clearly reaction to BRI and a collective promise to mobilize 600 billion that's real money now of private capital towards new projects in the global South. But then guess what, as we all do, Aaron, we had this thing called the election cycle in 2004 and this is exactly the problem because I went to the PGI site on the White House page, guess what? It no longer exists. It has gone to the ether. The PGI has been shut down. So the Trump administration has certainly seemed to share the concern over China's dominance over global development. But clearly taking a more what you might call isolated, at least from a distance scattershooting approach to deploying private and public financing to help counter China's assault. So whether you agree with Biden's multi country cooperative approach or Trump's bravado filled blitzkrieg, you might say the aspirations and interests are much more aligned than you might think. So I want to give you just a few examples of where this intersection is so clear because I think sometimes we read the headlines and it sounds all political, it sounds partisan, it might even sound crazy. But actually whether intended or not, there are massive infrastructure connections and codependency on a lot of this movement.

Aaron Filbeck (70:38)

So John, before you get into some of those examples, I think Gautam had some parallel thoughts to yours, especially from the asset management perspective in terms of how they think about that codependency and connection and where they place bets. Let's take a listen here.

Gautam Bandari (70:55)

First thing that I like to do is actually think locally. So we act globally, but we think very locally. And what are the nation's priorities? And generally of course at the big picture, everybody wants to industrialize, but what are the core strengths? What are those sectors that they would like to actually have an edge at? What are they exporting? Things that they would never touch. So if you take Mexico and as an example, near shoring is very deal to them. So when it comes to nearshoring, the government is very accommodative. So anything you do that supports that near shoring effort is welcome. Similarly, many export led economies have the same thought. So I think we try and build and buy and actually operate things that are near and dear to the local push. And I think that has always been fine. And the second thing I would tell you is if you have commercial contracts, you're generally fine. Commercial contracts withstand the test of time. The third thing, which is also to avoid to the second part of Your question, what are the things you do to avoid? Because it could be risk. We try and be below the radar screen. So no politician would ever put a tweet out for something that is 500 million, the $10 billion project. Sure they tend to be controversial, lots of complaints, lots of local opposition, international geopolitics come in. But smaller projects, sub billion, rarely ever make the news because they're quite boring. Especially today. In today's economy, everybody likes to talk about 100 billion a trillion. So fantastic numbers. My job is actually not to do any of those projects. My job is to do actually very simple commercial, bilateral type of projects or other projects that are below the radar screen but align with the nation's priority. The final thing I'd say is every nation wants to industrialize. I have not seen a country that actually says no, actually I want to do nothing. I've never seen a politician who says that. And some of it is understandable because especially as you think about the decade ahead with AI, as jobs get under threat, I think people want that security of supply that came through in the pandemic. But also people want to make sure that certain critical industries should be close to them and they want to specialize in them. Whether it's right or wrong, frankly, is not my role. I think that's the decision the society has made. And I think you cannot industrialize without infrastructure. The only competitive advantage you have is if you have very good infrastructure. Your cost of industrialization, your cost of goods tends to be lower, it tends to be more efficient. And the case in point is China fantastic infrastructure, over two decades was spending 9% of their GDP to build world class ports and roads and power grids and power plants. And as a result they became the manufacturing engine of the world. And the way I think of this is that US, Europe pretty much outsourced their infrastructure to China. We didn't have to spend 9% because somebody else was spending 9%. And we choose to spend 2, 3% of our GDP on it. So after two decades of that, you have a huge deficit and then suddenly society realizes that your apartment looks great, but the infrastructure is not great and so you want to spend on it. So that's why it has become a priority and so happens to be a time where governments are running record deficit. So guess what? The government's not going to do it. Nor does the government have the capability any longer. So it doesn't have those thousands of engineers on staff that could actually go out and build that infrastructure. So it is private sector and People like us with private capital who are actually builders, whose job it is to go out and do those projects, which is fantastic by the way, because private infrastructure is generally cheaper and runs more efficiently than government built infrastructure.

John Bowman (74:55)

I really like his points that every nation wants to industrialize, but I think where it gets tricky and complex is how you support that intent of industrializing. And it leads right into some of these examples I'm going to share with you now. So let's just hit a doozy to start with Venezuela. So look, U.S. energy company leadership and control of Venezuelan oil exploration and drilling is certainly a big part of this. I would never want to naively suggest this wasn't first and foremost about oil and I'm not making any meritorious judgment on the mission. But I think if that's where you stop, if that's all you say, it's a bit reductionist because I think rightly or wrongly, this was also one small part of a response to a growing infrastructure and trade foothold in South America from China. So let me just give you one example here that this once sleepy fishing village of Chancay, Peru, not even sure I'm saying that right. Chanche, Peru has become the crown jewel of BRI and a global logistical hub. So Guangzhou Port in southern China, which is the largest port in the south of China, the fifth largest in the world, has recently added direct maritime routes to Chancay, Peru, slashing transport costs for Chinese and Latin American exporters by 30%. And Costco shipping, which is the Chinese state owned container shipping company, owns a 60% stake in that Chancay port. And they've positioned that terminal as a regional logistics hub that will handle more than 1 million containers annually by 2030. So it's a big part of their aspirations now further to consolidate this new Latin trade nexus. And this is again from that Hill article I cited earlier in May of last year, which is 2025, on this recording, China and Brazil began exploratory talks on building in transcontinental railway to connect that port in Chancay to Brazil's interior. A move that would link Chinese built Pacific infrastructure with Latin America's Atlantic trade routes. And there's no doubt the US has noticed this infiltration in their backyard. And this certainly played a role in wanting to play a strong hand there one way or another. So that's Venezuela and South America right next door, the Panama Canal, the aforementioned Blackrock deal. Again, we see what happens when we think of the Suez when competing economic or military forces can disrupt narrow trade passages There are just a few of these constricted sea passages around the world and their concentration of flow if upset can bring the global economy to its knees. So if something goes wrong or a bad actor, as we saw with the Houthi, get mischievous like it is bad, bad news. And Larry Fink, I mentioned earlier the GIP acquisition at the time of his acquisition, I think he was spot on with this quote. He said BlackRock is taking a long term view of market forces that will drive outsized growth over the next decade, including growing public deficits, a modernizing digital world, advancing energy independence and the energy transition which are driving the mobilization of private capital to fund critical infrastructure. He says, and this is somewhat rhyming with what I mentioned earlier about the Golden Age infrastructure is just at the very beginning, the industrial logic is pretty large and the next 10 years will be greatly about the expansion of global capital markets and infrastructure, end quote. So Larry is still very much in the same camp as I think the theme of this episode. Let's talk about the Trans Arctic. Just to stay controversial here, Aaron, there is significant dialogue, as you know, about massive private and public cooperation for investment in Arctic icebreaker ships, undersea cables, polar satellites to broaden telecom resource extraction. Now again, before the annoyance, the higher blood pressure of what you might call poor diplomacy, saber rattling or on Greenland takes hold. Listen to this nonpartisan Belfer center for Science and International Affairs. On the subject of Greenland, they said, quote, as Arctic Seas ice melts, these routes could reduce shipping times and bypass traditional choke points like the Suez and the Panama Canal. Currently, these routes are commercially unviable and will likely remain so for many years because of treacherous weather and floating ice. In the long term, as vessel traffic in the Arctic Ocean increases, Greenland will likely become a key player in the effective management of the Arctic Ocean, including emergency management, prevention and response. The viability of these new shipping routes and other maritime activities in the region will depend, among other things, on investments in comprehensive marine infrastructure. Greenland is strategically positioned to both benefit from and help manage such investments, end quote. So again, I want to be clear, faulty bombastic foreign policy aside, what isn't debatable is that the US is decades behind in Arctic strategy and infrastructure and security and what zoom seems like perhaps a complete regeneration of maritime routes. Adding the Arctic as a new route. So clearly something to think about. Just a few more Aaron here, semiconductors, because all of these seem to be connected. The CHIP act, the government's minority share in intel here in the us this was an attempt to counter the reality that the little island of Taiwan I think as we all know, has market share of 90% of advanced chips, almost three quarters of global semiconductor output overall. And we felt that viscerally. If you remember in the pandemic when cars and phones and TVs and even smart toasters, my smart toaster took months to arrive. This is slow going but we've started to see progress with new fab projects from TSMC in Phoenix, intel in Ohio, Samsung in Texas, Micron in Boise, Idaho and New York and then Texas Instruments right here actually in my backyard in Lehigh, Utah Aaron where I live, two huge fabs being built, eight to 10,000 new jobs moving into the Utah Valley here. Hyperscalers. You mentioned AI data centers, but Meta and Oracle have announced massive new expansions in AI data centers with financing from various mostly debt sources. It seems like OpenAI SAM was touting this 400 billion Stargate expansion. I'm not sure I can believe all of that. Take it with a grain of salt but clearly the theme is obvious. The race is on and all of this is to maintain leadership in AI after that deep seek moment Last year we talked about the space race. A whole episode this season on the space race space economy episode. It's launched Musk's SpaceX to astronomical. You like that importance where the line between NASA and foreign policy and SpaceX launch activity, Starlink satellite, they continue to blur. Where one ends and the other begins is less and less clear. And then finally just finishing this survey of examples, a really interesting one is the renaissance of nuclear power. I don't know if you've been following some of this news, I find it really interesting but obviously nuclear's brand has been out of favor since the Cold War. And then of course deeply ingrained societal scars from Chernobyl through my island, more recently Japan's Fukushima and that's exacerbated this anti nuclear lobby. But the reality is that nuclear again all else equal and I know that's a big assumption all else equal is a much cleaner and efficient form of power. There are no harmful carbon emissions. It has a very small land footprint per unit of energy at least. So there is a significant VC money movement experimenting with small scale modular nuclear power reactors following the Trump administration exec order to encourage coal producing plants to work to transition to a more reliable and sustainable hydrocarbon forms of power. So again here in Utah I'm speaking about my backyard here. The very first test reactor just last week was delivered from a startup called Velar Atomics. This is a Southern California company Funded by the likes of Palmer Luckey, who's the founder of Anduril, that's the private military weapons manufacturer, execs from Lockheed and Exec from Palantir, a whole bunch of smaller VC firms. So a legit investing class that believes in volar atomics and Utah was one of the very first states. In fact it might have been the first state to actually receive this test reactor with the hope of creating a full scale nuclear energy ecosystem that would eventually provide energy independence from those traditional sources. So just fascinating. So those are lots of current, admittedly controversial infrastructure examples where we see this convergence of private capital, infrastructure assets and foreign policy. And of course I've been focusing on myopically much more on the us but obviously our multipolar world's other powers are all executing. Saudi, uae, Singapore, India, they're all executing on the same playbook. So all of this is to say that modern infrastructure is no longer just concrete and steel fiber networks, data centers, battery storage, EV charging, water resilience, emerging growth industries. These are the new economy. But just as importantly, I think the point of this little segment is that this collision of private global capital and national priorities are reshaping how to position, prioritize and assess risk return to the asset class like no other period in history. So return on trust and alignment, which is a goofy thing to say, but very real, are now a huge part of the calculus. They have to be versus just IRR or traditional ROI or cap rates or whatever metric you might use. So who controls finances and bears the operational risk of this 15 to 20 trillion dollars global funding gap that we described earlier? When I think, as I close here, Aaron, this is now my normative opinion that I'm shifting into. But when I think about the saturation of most global institutional pools of capital in private equity and private credit in comparison to fairly low allocations, as I've mentioned in infrastructure, this seems like an asset class with embedded momentum. And then just as I begun that portfolio dynamic with the tailwinds of new economic tech forward themes and geopolitical pressure and the supply demand dynamics of that marginal dollar of capital, it just seems very compelling to me. Infrastructure funds and interest are reaching all time highs. So if you can mitigate the regulatory red tape associated with these projects, particularly here, let's just be honest in calling a spade a spade in the US so we can unleash the secret sauce of public and private partnerships, this could be the most attractive asset class in my view of the next decade. I didn't say the highest returning but certainly the most interesting and the most attractive.

Aaron Filbeck (84:58)

So John, I want to bring Peter in one more time because I think what he had to say about why it's so hard to unlock private capital in the U.S. even when the need is obvious and the capital is sitting there, is the perfect way to summarize a lot of what you just said.

Peter Blue (85:14)

Why haven't we been able to do more and mobilize more things like high speed trains and some of the more modern infrastructure we see in Europe hasn't quite taken place in scale in the us There's a few different issues we touch upon, some of them in the context of energy. So certainly this multi layered approval process, particularly when a project spans multiple states, that can be complicated and time consuming and the backlogs that come from that can just delay projects endlessly. So massive projects that will go across state lines require a lot of capex and a lot of coordination. It's just very difficult in practice to align the stars to make it work between the regulatory bodies and environment, the political environment, private communities and then the capital providers and construction and development to execute on it. So there are a lot of headwinds that just make it hard to unlock that private capital. And there are other bankable projects that I think private allocators tend to focus on instead. So if the public policy incentives are there to do a new effort like a high speed trade, when you think about that, it's gotta be funded by some combination of private capital and probably taxpayer money as well. And if the taxpayer money isn't there because the budget constraints, then that's going to put more pressure on private capital. And that's likely not something that private capital will prioritize without more government certainty and public policy in place to secure confidence around what will be a multi year process and a lot of capex that goes into it. So the execution environment just isn't quite there right now. And what that trickles down to is uncertainty in the project in terms of risk transfer. So what risks are owned by the public market, by governments, and in turn people and the taxpayers behind the government? What risks are taken on by the private investors and the LPGP community and what risks are taken on by the construction, development, supply chain component of bringing these projects online? When those sands shift in terms of who owns what and where, the things like construction delays or policy changes or regulatory environment change, or even capital market shifts like the financing environment, interest rates, the GDP environment, when these things are all moving targets, it just becomes quick to allocate capital and Scale. So what you see is what's happening now. It's more of a prioritization of projects that are ready to be shoveled in the ground. So a lot of that's in digital today, A lot of that is in energy transition globally, where there's a clear offtake, there's a clear playbook on how to develop and execute these projects. There's pretty clear certainty around what it takes to get regulator and public or local government approval. So when that playbook is in place, that's where capital's gotta flow to

Aaron Filbeck (88:11)

the role of the government or the regulatory body that's backing a lot of these specific projects or is even building the foundation or apparatus around infrastructure is such an important consideration that wasn't there maybe 10, 15 years ago. We can talk about AI, we can talk about renewable energy, electricity, all of that stuff. But if you have a body that is able to turn the on and off, switch on some of the foundations, then what do you have at the end of the day, which I think is probably the biggest risk and opportunity for someone who's trying to build a portfolio around all of this. So it's just interesting to kind of think about the return on trust, as you said. But also at what point does the government step in and fund these? Where do they restrict, like we saw with the high speed rail in California, or where does it just get lost in the bureaucracy of these different states, countries, locations and so on. So more just editorializing, thinking out loud.

John Bowman (89:08)

The high speed rail, things like private property and eminent domain, rightly so, we take that seriously. Private property rights are important and there's other parts of the world where they would literally railroad that through for purposes of the greater sovereign good, you might argue. So again, I'm not making a judgment on the bureaucracy or the reasons for that, but I think we just need to realize that a lot of those headwinds that might be virtuous in our principled value set do hold up our ability to compete on a grand scale. And I would just also say Saudi, I mentioned this in passing, but I feel like they're doing this best from a PPP perspective. So China has the ability, has this massive treasury to fund the large majority of this through state debt, and the US does this very poorly. Saudi seems to have mobilized their entire private sector and certainly a very big government savings account, let's be honest, from the historical oil for infrastructure projects related to what they're calling their vision 2030 strategies. So you might be there this year in September, Aaron, but these Giga projects like the new high tech hub and renewable city Neom along the Gulf of Aqaba. The Red Sea Global project which is this massive luxury resort project on Saudi's west coast. There's this cultural and tourism renovation of the historic site of Deiriya. I went to dinner at this mixed use wonder in December and I was just blown away. And of course if you land in the Riyadh airport and take their metro which just started, I mean it's as nice as Singapore, it's as nice as Seoul, it's gorgeous. And that is PPP as its finest. Again, you have central planning. I don't want to get around the reality that there's a lot of authority in how the government wields and pushes and maybe even has their hand on one lever of that private sector capital. But man, it seems to be working awfully well. And he visited Saudi anytime in the last couple of years. It is pretty extraordinary what they've done

Aaron Filbeck (91:03)

maybe to quickly bring this home. On the portfolio side, so we've talked about different categories, we've talked about the geopolitical lens, which I think is an important one to have baked into any assumption whether you're talking geography or type. The boring assets of old have their own political ramifications, just like the future. Exciting parts of infrastructure also have political ramifications as well. So there's this connection between all of it and making sure that you have an understanding of that public part of the public private partnership. But I think also when you look at how returns stack up both across those different sectors or the size of some of those deals, there's a wide dispersion there as well. So the boring parts of infrastructure, the dull, heavy, hard to look at parts of the infrastructure complex, have average returns that look somewhere south of 10% if you will. So you're looking at more stability, income generating bond like risk. And then on the more extreme end you've got digital infrastructure, renewables and so on that are in mid teens to sometimes even up to 35% types of returns. So you can't even look at this with a broad brush anymore and say, well I've got my infrastructure allocation and I'm just putting everything in it. It's growth assets, it's income assets, it's growth sectors and so on there. And then on the size front, the smaller deals where a lot of the specialist gps are playing, have attractive returns but very high dispersion. There's a lot of risk due to the lack of economies of scale or the lack of access to some of these governments. Whereas the more commoditized and larger you get, there's probably more red tape, there's more interaction with the public sector and executing. And so that dispersion comes in much more. So maybe from a risk perspective, you've got the risk of the assets, but then you've got the risk of the outcomes within each of those. And then the other thing, and maybe going back to, I think it was our growth equity episode where you talk about return distributions of skewness and kurtosis when you put these in a portfolio. When you look at traditional infrastructure, the old parts of infrastructure, the dispersion of outcomes is actually pretty centralized around the means. So you've got a normal distribution, if you will, but when you start going into those sexier parts of infrastructure and the growth assets, you have much more VC like return profiles. So there's concentration in some of the high return portions of digital infrastructure and renewables and then lots of downside left tail distribution as well. And some of that is just because of the technology not playing out. But also you have to think about when does policy get in the way, when does process get in the way, how long do you have to wait for approvals? And so when I think about a portfolio construction question or a conversation, it's less about does infrastructure at 5% versus 10% impact the overall risk return, but instead I'm thinking of it more in terms of geopolitical alignment. Where's my geopolitical risk in the portfolio? And then what am I accomplishing? Whether it's aggressive growth, left tail skew distributions, or am I looking for your standard boring allocation? So maybe a bit of a high level wrap up of all the stuff that we just talked about, because there's so much that we've covered today. But I would think in those terms instead of less of an asset class placement and an overall portfolio.

John Bowman (94:19)

Two final thoughts. Just reacting to that, you reminded me of a quote I recently heard from a VC partner that talked about how he spends more time in Washington D.C. than he's ever had to before. And this was in the context of AI investments, but I think it applies very much to infrastructure and back to my skillset and expectations of ensuring that you're in the good graces, but also in lockstep with Washington on how to think through your infrastructure capital deployment. So that's one thing is this political element is going to fundamentally change how GPS act, how they spend their time, who they connect with, how they structure, underwrite deals, et cetera. You mentioned this cacophony of different segments too. It reminds me of the way we talk about hedge funds sometimes because the original purpose of that truly hedging against wild market swings, market neutral or long short. And then you've got the wild unconstrained anarchy of macro that can do whatever they want and is just trying to maximize. So just as you need to be careful and to talk about hedge funds as one allocation and the smart LPs don't anymore, the same I think will eventually happen should probably already start happening in infrastructure because of the core explosion out into some of these growth themes that have certainly more return but a lot more volatility and risk associated with them too.

Aaron Filbeck (95:41)

Agreed. And I would even maybe to put a bow on this. There's a lot of GPS and asset managers in the public equity market space as well. You know, we're bottom up, we only focus on the companies that we're attracted to and I think maybe more so than a lot of other asset classes. Infrastructure still has to focus on the bottom up because they're operating and sending these deals. But the macro has become even more important with varying degrees of size and scale and so on. But you can't ignore the macro when it comes to infra well there you have it.

John Bowman (96:09)

Huge opportunity I think huge upside, but a whole lot of constraints and challenges associated with it as well. So a really fun one. Intersection of geopolitics and an asset class Aaron, thanks for all the hard work. Really helpful in sizing helping us think through the investment thesis and decanters. I hope you appreciated the history and how to think through the context of what we're seeing seeing now in Washington. As we said earlier, it is a different form but it's just not all that new in reality. So thanks for joining us and we'll see you next time on Capital Decantan.