Torbjorn Caeser, Actis: Why not invest in ‘most of the world’?

Besides diversification, institutional investors looking to allocate to infrastructure typically seek low-risk, stable investments that do not display the volatility more often seen in public markets. For this reason, the case for ‘emerging markets’ infrastructure can be a hard one to make, as the general perception is that it would introduce greater levels of risk than desired.

That perception of greater risk can stem from concerns around regulatory regimes and the rule of law, economic and currency volatility and, in simple terms, geographical distance from an investor’s home market. But it could also be argued that, by looking at the risk of emerging markets through such a lens, investors could be missing other risks inherent in an approach that focuses exclusively on developed markets.

Torbjorn Caesar is certainly keen to question some of the assumptions that emerging markets infrastructure investment is, by nature, ‘more risky’. And for good reason – he is chairman and senior partner of Actis, an infrastructure fund manager known for its focus on emerging markets.

Populous markets

Caesar is not entirely comfortable with the term emerging markets and prefers “most of the world”, effectively excluding the US and Western Europe. The logic behind this lies in demographics. “You can say emerging markets, but there’s no good term for the non-US, non-European market,” he says.  “Some people have said ‘rest of the world’, but actually it is most of the world, because it is where 85% of the world population lives. And where you have that 85% of the world population, two-thirds of all investment opportunities and investment needs are in those markets – but you only have one-third of the capital chasing it, because two-thirds are busy in Europe and the US.”

By pursuing a narrow focus on developed markets, institutional investors are pouring more and more capital into a limited part of the global market. “That is the main driver of why we have continuously delivered outstanding returns to our investors,” says Caesar. “Being where one-third of the capital chases two-thirds of the opportunities just creates a much better risk-return outcome than being with two-thirds chasing one-third of the opportunities.”

This point can be illustrated clearly within the context of the energy transition. In developed markets, there is a big opportunity to convert fossil fuel-based energy generation into cleaner forms. But the opportunity in emerging markets is even bigger. “The need for new electricity is really massive in that part of the world. Depending on who you ask, we need to double the capacity of electricity over the next 20 years,” Caesar says. And that, he stresses, is “just the new electricity that’s required, without taking into consideration higher electrification – meaning electric vehicles, use of AI, and the energy transition”.

The energy transition, meanwhile, “where you want to then take the existing carbon-intensive electricity production and make that green”, sits on top of that and will largely play out in the US and Europe, “because you have an installed base, which you then want to replace.”

But which offers the best risk-return prospects: greening developed markets or building green from scratch in economies with the biggest need? In the US, for example, “you have electricity already, you have coal plants, gas-fired power generation and you want to replace that with green energy”, Caesar says. “That needs some sort of a political incentive to make that happen – even if green energy is now the cheapest form of electricity.”

This dimension – the political incentives required to push through the energy transition – is “a European and US phenomenon”, he says. “If you sit in other parts of the world – if you’re in India – this is not an issue. The issue is how we build new things, new capacity, new energy.”

Caesar certainly has experience on his side. He has been with Actis for more than 20 years, and before then worked for Swedish engineering company ABB in the late 1980s and 1990s.

Actis itself can be traced back to the UK government’s Commonwealth Development Corporation (CDC), set up at the end of the second world war. Actis spun out of CDC Group (known today as British International Investment) in 2004, operating as a private company until it was acquired last year by US asset management firm General Atlantic. Today, it has infrastructure investments in Latin America, India, Southeast Asia, the Middle East, Africa, and Central and Eastern Europe.

“We’ve been in those markets for a very long time,” says Caesar. “We now have 17 offices from Mexico City to Japan – some 350 people.” When combined with the management teams it appoints within its portfolio companies, “we have a coverage that is second to none in these markets”, he says. “That means that we can then source and pick and choose the best deals on that global basis.”

Engineers turned investors

Caesar started his career with ABB “as a young engineer” in 1987, “building a power plant in Egypt”, and has remained in the world of emerging markets “ever since”. This engineering background, before moving into the world of investment, mirrors that of Actis. “Having that background of building, operating, managing power businesses and then coming into the investment space – like an industrialist becoming an investor – that just makes us different.”

He continues: “Of course, we are financial engineers in a way, in that we are investors, but we also are actual engineers. We build things. So we are not acquiring assets, polishing them a little bit and then holding them and selling them a bit later – we actually build, we construct, we change, we turn around, we operationally improve things.”

Caesar says this sets Actis apart from other competitors. Then there is a focus on “sustainable infrastructure”, although most, if not all, institutional infrastructure investment managers would say they are focused on sustainability. But Caesar says that, for Actis, sustainability equates to “future-proofing” assets – and not impact investing. “It’s not a separate, secondary type of objective to save the world,” he says.

The focus on future-proofing is ultimately to improve the value of assets. “It’s no question in my mind that [because of] that strong focus, buyers will pay more when we exit these investments later on because they are sustainable, future-proofed, integrated in the local community,” he says.

The last point is important, especially for an investor building new infrastructure in many different markets. “If you have integrated yourself into the local communities, so that [a project is] part of the community, you have de-risked it [and] you have that community with you,” Caesar explains. Ultimately, he welcomes more competition in the markets where Actis is active. “We want more competitors, actually,” he says. “[With] more capital coming in, the perception of investing across these markets will change, because the perception is that it’s very risky.”