← The Infrastructure Investor Podcast
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- [00:03]
A
Hi, I'm Bruno Alves, Editor in Chief of Infrastructure Investor, and welcome to the Infrastructure Investor Podcast. In today's episode, I sit down with Sadiq Waba, founder, chairman and managing partner of i2 Capital. Sadiq returns to the podcast to tackle a broad range of subjects, including i2's cautious approach to investing in the AI infrastructure boom, why he believes the markets are underestimating the risks and impacts of the Iran war, the role of energy security resilience in infrastructure investing, the growing role of private wealth in infrastructure, and much more. Hi, Sadek. Welcome back to the podcast.
- [00:47]
B
Hi, Bruno. It's a pleasure to be with you here today.
- [00:52]
A
So the last time you were on was actually in October of 2024, and it kind of feels like we're almost in a different world today, and we have a lot to catch up on. But I wanted to start with something that you said last October, which I felt made a little bit waves in the industry, and you basically said that you politely declined to invest in the AI infrastructure boom. And I want to start there and ask you to remind our audience what you had in mind when you said that. And what are your main concerns and objections with the AI infrastructure boom.
- [01:27]
B
Absolutely. First of all, I think if you take a step back, the AI boom is really about a fundamental change in the way we're going to be doing business over the coming years. First of all, it's an extraordinary opportunity, and I think AI is without a doubt going to be an extraordinary opportunity for everyone. Of course, people are nervous, people are worried. Employment is the thing that comes to mind, number one. But when all that settles, I think it will be a extraordinary ability to improve our productivity, improve our learning, and I think it will be to the better. But every time these things arrive, someone who had stables with lots of horses suddenly finds himself maybe not needing horses in this case. You're having something which is fundamentally transformative and covers all sectors. And every time we look at these moments, we see opportunities and we see risks. So at I Squared Capital, we see the same thing. We see huge opportunities and we see risks. And when we look at the balance between the two, in some subsectors, in some areas, we see opportunities, in some areas, we see losses and risks, potential losses. And so you take a step back and you ask yourself, there's about $5 trillion between now and the end of this decade, so four years that will have to be invested globally. That's a large, large, large amount. Right. And with the AI revenues, which is roughly in total $60 billion, that really is a big gap between the total expenditure, which is in 2025, roughly $400 billion relative to the revenues of $60 billion. So from a purely financial perspective, I look at that imbalance, right. The second thing is the way the AI infrastructure has been financed. And let's cut to the chase. We're talking about AI data centers and so on. If direct loans, SPV structures, securitizations, GPU collateralized facilities and all sorts of other things. In a very interesting note provided by one of the key law firms, when you look at that, you suddenly see a whole set of litigation risk and default risk that they've been identified. And so we have to understand those because a lot of it is done through debt, right. And equity. So the total capital expenditure, as I said in 2025 was about $400 billion. But as we know, in 2026 it's expected to reach $700 billion. But the revenues are not there. So the fundamental model itself is not yet proven. Right. When you look at the companies that people say, well, they flush with money, they have lots of assets and so on, well, Amazon for this year is projected to generate negative cash flow of about $28 billion. Alphabet meta are expected to see their cash flow drop by 90%. So when you put these numbers in perspective and then you add to it the fact that they look to create different type of structures which are off balance sheet, like Meta's Hyperion Data center which was done by Blue Owl Meta and then put out the debt bought by people like BlackRock and Pimco and Apollo and so on. That is an off balance sheet item for Meta and the guarantees end up being a little footnote in the balance sheet. So put all of this together. I'm simply saying is if I'm going to make investments in these data centers, I'd like to be properly compensated. I'd like to be compensated for the fact that there is a structure. I'd like to be compensated for the fact that this will put pressure on cash flows of companies that are otherwise extremely helpful. I like to get compensated for location and residual value. That's all I'm saying.
- [05:39]
A
Yeah, and that makes total sense. And just to try and unpack it a bit and get the kind of the I squared perspective out there which you've been outlining. But so you're looking at this sea of CapEx that is out there for AI data centers, looking at revenues that are well below AI revenues. What this number is, this CapEx number is, is it a difficulty from Your point of view in finding the right opportunities there? Because maybe contractually it's hard to get to the right place for i2 or a belief that you think not all of those data centers will qualify as essential infrastructure. Some will and some will be proven not to be essential infrastructure. Or is there also a fear of litigation risk as you've just outlined? Just trying to get a hierarchy of your concerns almost, if that makes sense.
- [06:29]
B
Yeah. Look, the truth is it's all of the above because the litigation, the fear of litigation comes from what Comes from potential restructuring. Potential restructuring comes from lack of cash flows and so on and so forth. So I put it in a very simple way. Do I believe that I'm getting compensated enough? In some cases, yes. So on our credit fund we have lent to some of these AI data centers and the rate at which we lend for the particular risk in these assets, very attractive. In many cases we've declined because we haven't seen that. Take a step back. When I look at all the potential investments that i2 looks at on an annual basis, 98% is rejected. So it's the same thing here. We look at lots of opportunities. Some of them are very attractive and some are not. Many are not in our view. I can tell you of quite a few investments over my career where we passed on and they ended up being a good investment. I can also tell you of many opportunities we passed on and they ended up being very bad investments. So thank God we didn't do it. As long as the latter is more than the former. Right. Then I think we're doing our job. Right. We don't invest in speculative risks. I'll give you an example of what we do. We building power generation with carbon capture and entering into long term PPA contracts, not lease agreement. Long term PPA agreements to sell power to some of the large tech companies under 15, 20 year contracts. And that power is used by them for their data centers. It could be used for edge, it could be used mostly of course for AI. So here I'm playing a role in exactly that AI boom but by providing the power. But for me, the comfort gets from I have a power plant, I produce electrons which will always be needed. I have a long term PPA contract with its own characteristics and the user on the other side, the purchase of the power decides what to do with that electricity for all sorts of needs. Right. Not just AI data centers. And so I prefer that type of risk.
- [08:45]
A
Yeah, no, and that makes sense. And one of the things I wanted to kind of also get your opinion on, because as you all know, there's a lot of discussion, a lot of argument as to whether some of these data centers constitute essential infrastructure, and particularly the AI data centers. And the argument that I tend to hear a lot from proponents, and especially when you press them as to what will happen if things go wrong with the counterparties, et cetera, is they will tell you a variation of even if I build a big data center, and even if it's in a somewhat remote location, it's still essential infrastructure because it's been built, it has all the permits, it has its power connections to the grid, its fiber in place, et cetera. And so even if there is something with a counterparty, we can switch gears, et cetera, but that essential infrastructure is still there. And I'm just curious what you make of that argument.
- [09:40]
B
I think it's a fine argument. Everything you just told me I could replace it by saying commercial real estate, by putting the word industrial storage and so on and so forth. Literally you just said. The only thing you said in that sentence that will be different is AI data centers. Otherwise I replace it with lots of things. So I don't see anything, if you know what I mean, that is completely different. The difference is the magnitudes and the size. And when I see these numbers and I see the speed at which this is being developed, I tell myself, okay, this is obviously exciting, but I want to be careful. And I always say that is I2 looking to do a home run? I'd love to every time, but we prefer to focus on singles and doubles, and that's what we do.
- [10:28]
A
And Sade, you mentioned the power play, as it were, one of the ways to capitalize on, on this opportunity. And I just wanted to very quickly ask your view on what you're finding attractive in digital infrastructure more broadly. Maybe that includes cloud data centers, maybe it doesn't. But just maybe a quick overview of what you like about the digital infrastructure space as it stands.
- [10:52]
B
Okay, I'll give you an example. I remember you and I had conversations some time ago, around the 2000s, 2021about fiber to the home was a huge boom. People made massive investments. We respectfully declined. The multiples were very, very high and we couldn't. Okay, you look at today, many of them have had to restructure. Equity on many of these is now zero. And in our case, we developed one company in Texas actually, and our first investment when we made it was $75 million. We stayed at it for two, three years without doing anything. Today we've deployed close to $700 billion in equity. But we are very patient and we said no, to my earlier point, 99% of the time. And we avoided these kinds of investments that turned out to be, at least the ones we looked at that other people invested in turned out to be, unfortunately, a very bad outcome.
- [11:48]
A
We've just returned from our global summit in Berlin. Of course, there was lots under discussion, as usual. But I think one of the things that maybe struck us the was that publicly at least, what was coming across as a relative lack of preoccupation with the potential impacts of a prolonged war in Iran. So we're recording this at the end of March just for our audience's benefit. But as someone with an extensive global portfolio, I just want to pick your brain about how you're thinking about the impacts of the war and just get your view on this.
- [12:24]
B
I look at the market, I look at where the market is and it's a reaction to the current conflict in Iran. And I think the global economy is sleepwalking, or I should say not the global economy. Investors are sleepwalking. And sleepwalking has generally been referred to the First World War. There's a very good book with that name where people were sleepwalking towards what ended up being one of the most brutal wars in modern history, and which could have been avoided, by the way. But having said that, why am I saying that? Price of oil is at 100 plus and will remain at 100 and above, in my personal view, no doubt till year end, if not well after. Number two. The implication of that, of course, on inflation is significant. You look at the gasoline at the pump station here in the US it's way up. It's exceeded now $4 a gallon. So that immediately is going to put heavy pressure on the Federal Reserve as to whether they need to manage employment or manage inflation. And as we enter in 6 months time officially into a recession, then they'll face themselves with a significant slowdown in the global economy and higher inflation. And that's what we've tried over the last couple of years to avoid as much as possible. And however much of the Federal Reserve and other central banks were criticized, they did a very good job. That war, of course, is not their own doing, but it will be the undoing, if you want, of what we've tried to do over the last decade or so to try and manage a global financial crisis, followed by massive quantitative easing like we've never seen before, followed by a pandemic, followed by supply Chain issues and the conclusion that we all have to have our own supply chain, which causes itself its other issues followed now by a series of conflicts which are causing that major structural change in the economy. The price of gas has gone through the roof. You're looking at prices at $25 for LNG. So that is going to change. Will it change the behavior of all producers will change? I don't think so. You look at U.S. oil producers, especially shale producers, they'll be very hesitant because they got massively burnt in 2015. And so will they add another rig or two? I don't know. Probably not. You're going to have we talk about supply chain. A fundamental change in the way people are looking as where to get their supply from. So Europe, which we're relying on LNG and oil from the Middle east, not happening anymore. So where do they get their gas? Where do they get the oil? Do they get it from Russia? Do they get from the US we just learned this morning that Italy has closed its airspace to US Military aircrafts flying through. That's now the second country in Europe that does that, which is part of NATO. So I'm just trying to say is I'm surprised that the markets have not adjusted much more dramatically than it has today. And as I said, I think when I think about investments in infrastructure, if my model assumed an inflation of 2%, 2 and a half percent, change that. If you think that you'll have easy access to capital markets, change that. We were talking earlier about AI infrastructure and AI data centers. That's because the capital markets have been very attractive. But you see the capital markets right now, nothing to do with Iran. Conflict is under pressure because people have decided, for whatever reason they think that private capital has issues and whatnot. So you compound that and capital markets can dry up overnight. I've seen that happen many, many times in my career. I was on the capital markets desk at Morgan Stanley. One day people could access capital markets very easily. The next day, for weeks, nothing is available. So I go back and tell you we're sleepwalking.
- [16:29]
A
Sadiq, do you think this is going to be one of those moments? And obviously people, we think about this and we think about Ukraine also, but you know how the energy transition has been framed and some of the underlying technologies, and there's sometimes a current that pushes against the price that comes with it, the affordability. But I am wondering if you think this is going to be a moment where some of that higher costs can be rethought as the higher cost of Maybe having energy security compared to being dependent, for example, on lng, which becomes a very volatile commodity. Do you think this is going to be one of those moments or it's not yet clear. It depends on the duration of the war, et cetera.
- [17:11]
B
Listen, the biggest winner in this is China because China has consistently invested in renewables over the last decade and that has been a major, major shift for them. So people say, yes, but they build coal, that's true. But the amount of renewable that they've built is equal to almost the collective amount that Europe and the US built together. So they haven't given up on that. So from my perspective, I think there is going to be a fundamental change. The change happened. I think there's been in particular in the US a pause because the current administration is not supportive of renewables and is looking to support other things. Interesting. By the way, conflicts like we've seen, even though it's of course US led. What I'm saying is have allowed the fact that we've been effective developing our oil production and gas production has provided an ability for the US to insulate itself from these shocks. Correct. So there's no doubt about it from a strategic perspective, I can't tell you from an environmental or whatever, from a strategic perspective, it's been the right policy, there's no doubt about it. But I think there is going to be a need for revisiting the current policy and bias against renewables. You talk about having to build hundreds of billions of data centers. I briefly mentioned the fact that we need power generation and that is an area where we've been focusing on. But okay, if you're able to build battery systems, you're able to build renewables, whether it's wind or solar, all of that, instead of having the new regulation that forces you to build very quickly between now and July 2026, otherwise you can't go and farther. I think if that could be extended, that will be a huge plus.
- [19:01]
A
And sadiq, given how much more volatile the world is today and kind of seems like it will remain that way. Do you think infrastructure as an industry is ready to think about resilience, how to incorporate it into assets, portfolios and underwriting? Maybe more seriously than it has thought to date. How do you see that?
- [19:25]
B
I think that is already underway. I can tell you it's an integral part of what we do at I Squared Capital because it matters. From a return perspective, a very simple example. If we're able to demonstrate to insurance companies that ensure our projects for business interruptions for whatever that we've done a thorough job on making our investments more resilient to climate change. And climate change is, it could be hurricanes, it could be high temperatures and the material that you've used are no longer appropriate. It could be you're in a flooding area which would not have been the case a decade or earlier ago. So we have a team that focuses on these issues 24, 7 at the asset level. And what does that do to us? Among other things, it helps us reduce high risk premium. And it's very simple. If I can reduce by a dollar the cost of those risk premium, and let's say you're buying things at 10 times multiple, okay, you have a 10 times $10 value that goes straight to the bottom line. That's not bad. So I think that is happening across all levels. It's just people will call it different names, but I think that is happening. And I think we're going to get the version 2.0 or 3.0 if you want, in the coming years. Bruno, you and I know that a couple of years ago there was this euphoria. Banks decided to do resilient funds, green funds, climate funds. There were groups put together by very prominent people, including the current Prime Minister of Canada, to create these groups that will give direction. And if you join them, then you get a little medal and all sorts of good things. All that has overnight disappeared. And what have we done at I squared, we didn't really participate in all of this. We continue to do our work. Has it changed? Not at all. And so there's a lot of hype, unfortunately, when some of these things happen. I think the next version in the coming years will be much more realistic, practical, and I think much more powerful at the end of the day, because it had become, in my view, too politicized. There is not a single person today, I don't care what their views are, that will not think about how can I make my investments more resilient. The outgoing governor of Florida, who does not like to talk about climate, is the biggest proponent of creating a resilient economy. Because floods, because of drought, because of too much water, because of hurricanes, because of the fact that it's difficult, if not impossible to get insurance for your house. So he's the biggest proponent. I think it's a different way of looking at things, but it's like what sometimes I like to call observationally equivalent. You end up getting the same outcome. But okay, you want to call it something different, you get there through a different road, correct? Absolutely.
- [22:28]
A
Sadiq, one last question for you and you've sort of alluded a little bit to some of the troubles or the perception of trouble in private markets. And one of the last things I wanted to discuss with you was the so called democratization of private markets and increasing role of private wealth in fundraising, including in infrastructure. There's a lot of discussion around this at the Global Summit. You know, we had some good discussions on it and particularly what the right structures are. And I guess the detractor view of getting some of these forms of capital, they kind of go and kind of state that semi liquid products in non liquid investments in private wealth are not a good thing, they're a disaster. And very much thinking of the redemptions currently in private credit. So my question to you is two pronged. First, I want to get your take on the potential of private wealth and infrastructure fundraising, but also your view on what the right structures for this capital are.
- [23:26]
B
You mentioned the idea of democratizing infrastructure. I actually liked. I don't know who coined it, but I think it's a great way of describing it. I have always been, if you remember in all of our conversations, a huge proponent of ensuring that pension funds make investments in, in what I would call core infra, in a way that is more available for them. And I'm talking specifically in the U.S. where U.S. municipalities and states, agencies and whatnot should enter into mutually attractive public private partnerships with pension funds so that they're able to earn a return 7, 8% on something which is very stable long term and be able to make these investments. If you take that to its next step, make it available directly to the people. Now you want to know exactly what you're investing in. You want to have a well diversified portfolio. It's different to have an institutional investor than high net worth or retail investor. But there are rules and regulations for that. And I think everything that I've seen to date seems to suggest that people are being very careful, very cautious and describing these products the way it is. You have some liquidity, but this is not the kind of liquidity you expect. As if you're buying a stock, you make the comparison with private credit. A private credit has the implied connotation is credit is more liquid, much more diversified names and of course it is a debt instrument, other things being equal, should be more liquid than an equity investment in a. I have no idea, in a municipal waste facility. I mean that goes without saying, right? So when you come to build a fund that has liquidity around private credit and that private credit is not even infrastructure, is mostly corporate loans and so on. That should be much more liquid by definition, much larger assets, much deeper capital markets. I mean, it's apples and oranges. So the fact that this turned out to be not as liquid as people think and gates have come down, that's a separate issue here. You should not expect liquidity where I can put in as much as I want and hopefully everyone that does these funds have the right type of disclosure and people understand it. And so it's a common obligation for everyone to really try to explain that this is very different than what you think. Does it give you some liquidity? Yes. Does it give you the liquidity the same as say a private credit fund that's an evergreen? Absolutely not. So in that sense, the obligation is on everyone to explain exactly how these things work. The idea of expanding it to 401 s and Social Security in the U.S. in principle, I think it's a very good idea. But I think what I would do is start with a certain type of assets, more like what the UK had, which is PFIs. People didn't like the PFI because it didn't do what it was supposed to do for the government perspective, but some of the investors in PFI did very well. And all I'm trying to say is you can create the equivalent of the PFI as a way to democratize and to introduce investors to infrastructure investments. Some people will say, well, but that's already what you have in the form of municipal debt. True, but here you can invest longer term, you have an equity and presumably you would make a premium over the municipal debt. Otherwise, then it doesn't make any sense. And so you can earn a return and people can add that to their portfolio. And I think from as you use the word democratize comes with it responsibility and the ability for you to have a say. Right, because that's what we also saying. It's not just distribution. With democracy comes the right to give your opinion. Correct. And to vote. And so if tomorrow a state privatizes its airport and allows a state residence to buy into the equity of that airport, with it comes a responsibility and an obligation on the part of these investors to express an opinion. There would be general assembly, they have the right to vote, and so on and so forth. So I think that's what's interesting. And I believe, having done a lot of research, a lot of state residents would love to invest in their roads, would love to invest in their airports, and so on and so forth. So I think it's a very positive thing as long as we do it the right way.
- [28:11]
A
Sadek, I think that's a great note to end this on. Thank you very much for coming back on the podcast. It was a pleasure to have you.
- [28:18]
B
Always a pleasure to be with you. Bruno, thank you.
- [28:24]
A
That again, was Sadek Waba founder, chairman and Managing Partner of I Squared Capital. To hear more of our episodes, head over to infrastructureinvestor.com podcast or you can search and subscribe to the Infrastructure Investor podcast wherever you like to listen.