Passion and Profit

15 / 12 / 2020

A Guide to Impact Infrastructure & Climate Friendly Finance Doing Well and Doing Good with Mis-priced Risk

The end of 2020 is finally in sight. Christmas, in whatever form COVID chooses for us, is just around the corner. Many of us are going to stay up until midnight on New Year’s Eve just to make sure 2020 has ended as much to welcome 2021.

I would volunteer that most investment committees are exhausted from the sheer number of meetings and read pages this year. Returns, exposures, over and under valuations, cash flow, schizophrenic risk tolerances, and renewed foci on diversity and ESG have all lead to committee members needing to step back and take a breather or, at least, take a re-look at the investment landscape.

Nevertheless, January is coming soon, and our fundamental challenges remainhow to have enough cash flow to pay the lights and salaries and to get sustainable/reasonable returns. In short, it seems as if we need to put on our multicolored Silicon Valley and Keynesian hat while trying to leave the Earth in better shape.

Hard, impossible- I am not so sure. For me, I believe there are investment strategies which can do well and good without taking undue peer risk. Today, I would argue that global impact infrastructure is one of those opportunities which can give you limited risk, good cash flow, and sustainable mid-teens equity returns. For some time now, forward thinking CIOs have been rolling out of growth equities or public fixed income and exchanging them for long term streams of income in real assets, infrastructure, or real estate. This is not a risk reduction exercise but more a recognition that their funds need several return engines to function over the next decade- unlike the last three decades.

I would argue that this needs to be taken one step further. Impact infrastructure aligns these return characteristics with underwriting projects under sustainable standards. Taken globally and in the mid-market, these smaller projects add a higher risk premium to look very attractive to investors- especially if the market risk premium is higher than actual experience. This is especially true in Latin America where perceived risk is historically higher than Africa and Asia. I would argue these mid-market strategies, which average less than $200 million, also have higher impact multiplier effects than their much larger brethren and can be better structured in many cases.

So how does one find and hire a manager in this space? Not easily. This is why Exagon Impact Capital is so unique in my opinion and why I have agreed to be Chair of its Advisory Board. Those of you who know me remember my long commitment to Emerging Markets and why I continue to believe that our portfolios should reflect the world which will be and not the world which is.

Exagon represents a seasoned debt and equity team whose multi-decades experience in Latam cannot be replicated. We all know asset management is ultimately about trust and people. It is also about good process and passion. Exagon’s principals and Advisory Board understand what is needed in infrastructure in LATAM to go from development to operations and how to secure and document these deals to protect both investors and communities. They bring passion around impact and sustainability- not because it is fashionable but because this is what they have always done. And when you see a picture of a wind farm, they remember the endless conference rooms and conversations to get it done as well as the lives that have benefitted from the project.

So, when some of us look for 12-14% net returns with dollar income streams approaching 7% over a decade in 2021; I hope you will seek out uncorrelated strategies like global impact infrastructure. I hope you will ask your consultants to do a broad review. You may be pleasantly surprised at what you find. Sometimes, doing well can be doing good.

Cynthia Steer

Chair of the Advisory Board