Talk Your Book: What Even Is Infrastructure?
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Today's Animal Spirits Talk Your Book is brought to you by Scion Investments. Go to scioninvestments.com, that's C-I-O-N. To learn more about the Scion Grosvenor Infrastructure Fund, it's ticker C-G-I-Q-X. Again, that's scioninvestments.com to learn more.

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. Michael, on our talk your book today, I learned something new. You sound surprised. I'm learning all the time stuff that I've more and more stuff I don't know. I learned today that a lot of the new terminals at airports are in our investments by private companies and infrastructure funds are not paid for by taxpayers really.

I didn't. Did you know this? I wonder if it's a mix. We didn't even get into that. Or the municipalities own it, but then the municipalities still own it. It's a lease. But anyway, we're talking infrastructure assets on the show today. And I've been traveling to New York for the last 10 to 12 years regularly. And I'll be honest, LaGuardia, when I used to come in, felt like a third world country. It was awful. One of the worst airports ever. It was just terrible. And it was hard to believe that

in this greatest city in the world that it's like this. And then all of a sudden in the last few years, they totally redid it. And now it's absolutely amazing. And I guess maybe part of that is because investors stepped up to the plate and helped out. Loved it. I love LaGuardia. We spoke, here's what I learned. You know what? I don't want to step into any material. I'll swallow that. So on today's show, we talked to Scott Libman, who's a portfolio manager at GCM Grosvenor.

He helps manage the Scion Grover Infrastructure Fund. And this is a great primer, I think, on just infrastructure investing itself. So as Michael said, we won't step in too much. Here's our conversation with Scott. Scott, welcome to the show. Thanks, guys. Excited to be here. All right. Everywhere I go, it seems like there are cranes, there is construction work, there are loud noises, people with hard hats.

The rails of the United States are old. And one of the biggest trends in the, I guess, asset management industry, I don't know where else to put this, is infrastructure. You listen to Larry Fink. I don't know. He gave a multi-trillion dollar number over the next X number of years. I mean, just a lot of money is going to be poured into infrastructure.

revitalizing the foundation of our society. So I see JFK being redone. God knows how long that's going to take and how much money. I see LaGuardia beautifully redone. So that's what we're talking about here today, right? We're talking infrastructure. So where all do you fit in the ecosystem of asset management and infrastructure and end investors? Yeah. So within that ecosystem, we want to do as much as we possibly can.

So our approach is we're looking at everything, right? We'll take everything from the most core focus risk off income generating infrastructure to a more value added, pull some levers, bring on the private equity toolkit type of approach from a return profile perspective. And so depending on where we're working and what we're trying to achieve, we're going to do a little bit of all that. And so, again,

You talked about JFK. You talked about LaGuardia. All that stuff's in our portfolio. Meaning what? Meaning what? Meaning we are an owner of each of those assets. So we have an investment in Terminal 6 at JFK alongside Vantage and Corsair. We have an investment...

in LaGuardia Airport in the central terminal alongside Vantage and a group called Jackmel. And so what our team does is we seek to access infrastructure wherever it is. We want to build the biggest, broadest, most diversified portfolio so people can touch and feel all of it. So not to go too deep on just airports, but we mentioned them twice. I am curious.

How, what does that mean? Where does the revenue come from? How does it get, how does it flow through to the government versus the investors? Like, what does that look like? Every airport is a little bit different. I cut my teeth early in my career with an investment in London city airport with another investment. We were part of the team that took the San Juan airport private.

back in 2012, 13, and now doing a lot more in the airport space. Principally speaking, you've got two major revenue streams. One is the basically cost of landing at the airport for the airlines. They typically call that a cost per employment, a CPE. And it's based on how many people are on the plane and who lands and how much it costs, et cetera. And then the second revenue stream is what's going on in the terminals.

Now, when I say there's a lot of different versions of airports, not every airport will pay you or will give you the right to manage what's going on in the terminal. Some airports will have a different way that they structure the revenue stream with the airlines. But principally speaking, those are your two types of revenue streams. You've got the airlines and the airline revenues.

And then you've got, basically, you're running a captive mall inside the terminal. And how predictable are the cash flows of something like that in part two of the question? Do you exit those investments ultimately? With regard to your first question, they can be very predictive depending on the structure. But again, we're going to get a little wonky here. And what I'll tell you is, on the one hand, if you looked at the structure of the San Juan deal, there was...

a rev share or really kind of a cost share, if you will, for all of the airlines. And so the baseline revenue was consistent year to year with an increase year over year, basically reflecting inflation. And so if an airline pulled out, we still made the same amount of money. That's one model. Another model. And so, by the way, in a model like that,

the airlines are incented to land more planes because their marginal cost goes down. Another model is very simply basically a landing fee for every airplane that comes in, and that's more of a volumetric approach. So in an airport like JFK or LaGuardia where you have scarcity, there's a cost to land, and so they want to get as many passengers on the plane as possible, but there's only so many landing slots before –

They max out the airport. And that's the way that those revenues will work. So those are two examples of kind of the airline revenue.

And then on the airport side, on the terminal side, typically what you're doing is you're leasing out space to retail. But do you exit that investment ultimately, or is this just a cashflow type of thing? Second part of your question was the exit. It depends, right? So a great example, there are fantastic...

infrastructure investors who've invested in things like Gatwick or London City. And then when they build it to core, if you will, what they do is they put it in a new vehicle that's income yielding, lower cost of capital. They own it forever. But typically what we want to do, especially if we're in kind of the business of improving airports,

Our view is we do those improvements, and then once they're complete, five, seven, 10 years in, we can sell to a lower cost of capital. So you can do it either which way. And really what it depends on is what's your return profile in the vehicle in which you're holding it.

So I'm curious, how long have these airport investments been going on? Not just by you personally, but I guess most people would assume, well, the municipality and the taxpayers pay for this. Yeah, it's a great question. Is it relatively new? So it depends on where in the world you are. So in Europe, this has been going on for some time. In the US, there's a very limited number of airports where this is actually in play.

And that's because it's very much a politicized experience, right? So for those that are in the New York area, you may recall that years ago, there was a debate over whether this would happen at Westchester Airport. And it went all the way through and it got voted down. They ran another process. They closed another one and it got voted down again. Nothing's ever happened at Westchester Airport. It's still owned by the municipality.

When does it work? When do you see private capital moving into airports when the municipality just can't fund it itself? So JFK, LaGuardia, these are great examples. I mean, if you've been through LaGuardia Airport post-renovation- It's gorgeous. I love it. It's a totally different animal, right? A bottom five airport forever, an example of all that's wrong with US infrastructure. Right.

And then they bring in private capital. They finish it on time, on budget. And it's one of the top five airports in the US now. Just a tremendous transformation. And what's interesting, what is it that the private investor has? They don't own the airport. They have the right to operate the airport for a period of time. So the municipality still owns the airport.

And what you're getting, what you're bidding on is a lease to operate if you're willing to spend the money to make the improvements. All right. So that was great. Maybe let's take a step back. So that's on me. That's on the host for not broadening this out. Let's go broad, okay? So infrastructure. One of the challenges with a lot of these alternative investments, as we just discovered in the first nine minutes of talking to you, there is a lack of education. There is a lot to learn.

We understand, I guess, at a very, very high level, the opportunity set. What type of an investor should consider an allocation to infrastructure investments? What sort of return profile potentially could it deliver alongside risk? What about liquidity? You guys are coming at us. There's

There's a lot of alternative asset managers that are coming for the retail investor, but we need to know what we're dealing with. So please speak to those things. I'm sorry, I just asked like five questions in one. That's okay. They're the right questions to start with. The first one is an easy one. Who should be interested in infrastructure? The answer is everybody, right? The answer is there is no investor in the market that shouldn't be considering infrastructure for their portfolio. Infrastructure's correlation to the public markets and to other parts of the private markets

is something that's so unique that it's something that really can create diversification in a portfolio. And that's critically important. I would agree with that. Now, what return profile should an investor be looking for? Well, this is where it gets really interesting. And I think this is where a lot of the misconception around infrastructure is. Infrastructure can be... And when people thought about infrastructure historically, it was...

low risk income generating fixed income replacement right and that's core infrastructure but let me tell you about the journey of core infrastructure core infrastructure was a 10 plus percent returning animal when i got started in the space 25 years ago then everybody showed up and guess what happens when everybody shows up you get competition returns get lower exactly right

So over the course of the last seven to 10 years, everybody stood up a core focused fund and those funds started competing with each other for assets. And you saw returns go all the way down to 7%, 8%. And then what happened? 22, 23, what you wind up with rates go up, credit gets more interesting for those lower returning profiles.

And what we know, if you've been in infrastructure a long time, is it's not fixed income. It's an operating asset. It can break. And when a 7% asset breaks, it's not a 7% asset. What does that mean when it breaks? Just the municipality can't pay anymore or the revenue stream isn't as big as you thought? Forget about the municipality because this is all, we're talking only private infrastructure here, right? Because that's the investment opportunity. You can buy muni bonds, but that's a different investment opportunity.

Immunity bonds will finance infrastructure from time to time. But here you're looking to invest principally in the equity of infrastructure, and that's a private opportunity. But what does it mean when it breaks? Let's say you buy a power plant and the power plant has a 25-year offtake, but the power plant goes offline. It breaks. Let's say you invest in a port. This is an interesting one. Like the Port of Baltimore.

And God forbid, a boat crashes into the Francis Scott Key Bridge and your port is closed for six weeks while they repair or they clear the debris. The infrastructure breaks. Let's say you're building renewables. And when you're building renewables, you underwrote a certain cost of debt and a certain cost of construction. And you have inflation and you have higher interest rates. Well, your model is going to be totally wrong.

Those are examples of assets that very much were traditionally considered core that could break. And when they break, that return comes down, right? So from my perspective, there's a lot of folks that really like that core. You got to be careful at what return you want to do core. Scott, sorry to cut in, but can we just, this part is important just in terms of understanding the flow of all of this. So something breaks, a boat goes into the bridge,

Whose responsibility is that? Does the capital get a call? Is this purely on the government to figure it out? What actually happens? Well, it's different in every scenario, but what actually happens is your revenue stream changes. So it was not the fault of the port operators that that bridge came down, but they now have a situation where the port is closed.

for six weeks. They've got to clear the bridge debris. They've got to investigate what happened. And now you also have years until you get another bridge built. Why is that bridge important? The bridge is kind of where the trucks are leaving from the port. So it's going to impact revenue in some way, right? So what changes for you as the owner of the infrastructure is the revenue stream, irrespective of whose responsibility

the fix is. Now, in some cases, there's a responsibility for the fix as well. So as a manager of this type of strategy, what is your risk management strategy for this? Is it just broader diversification? Is it a better understanding of the type of assets you're in? How do you hedge for that risk? Yeah. I love this question and we get it all the time. You buy Bitcoin. And we don't buy Bitcoin. Well, maybe we should, but we don't.

So for us, diversification is critically important. Infrastructure assets are chunky. So when you go and you invest in an infrastructure fund, one of the challenges that I see is they've got to write huge checks. They might only do 10 investments. If one of them goes wrong, it's complicated. You invest in a fund like ours, you're going to have 40, 50, 60 exposures.

And if something goes wrong, it's not going to turn the fund upside down. So diversification is really important, but even more important than diversification, you know, Ben, when I think of the answer to your question, there's nothing, and this is fundamental to investing, put infrastructure aside for a moment, it's just buying right, it's entry price. And so what we've learned is because people focused on infrastructure as a potential fixed income replacement, that gave people a license to

to pay more for it, to bring returns down for it. But you can bring returns down so far that you make a mistake. And so for us, what's critically important is understanding the entry price when we invest to ensure that there is enough return opportunity to make the asset interesting. And so diversification, buying right, those are the two keys in our mind. So you mentioned the competition.

So talk to me about how deals are won, who is in them. Is this a consortium of investors? Is it a single lead investor that wins it? How does that process work? Are you bidding and can you win, but accidentally lose because you pay too high a price? Like all of that. What does it look like? Just like private equity, everything's in play.

Everyone's going to tell you that their track record is principally bilateral. They're not doing auctions. Auctions are too expensive. That's where you wind up having to overpay in order to win. Obviously, the banks are going to tell you a lot of things get won through auctions. So somebody's got to be right there. There's a lot of things happening in an auction. One of the things that we do that's a little bit different

And this is a little bit contrary to the typical approach to infrastructure. Everyone will tell you, you got to have control. You've got to be the lead investor in order to make money. Because if you don't have control, if you can't control the business plan and the exit, who knows what's going to happen? We actually disagree with that. Our view is you got to be in the best assets with the best partners. And if you're in the best assets with the best partners, you can afford not to have control. The benefit of our approach is

is we can be far more diversified and we can use the information we get on all of the deal flow we see to assess relative value. And that's really important because we're going to see a lot of data centers. We're going to see a lot of airports. We're going to see a lot of generation facilities. But everybody that owns one is going to have a different approach to where they think they can make money

We're going to come over the top. We're going to look at all those outcomes and we're going to judge who we think is most likely to be right. And that's where the opportunity is. Ben, do you think that Grand Rapids could use a little bit of a facelift, your airport? We're getting one now. They're putting on two new terminals. We've got a lot of infrastructure investment going on there. I hope they get some more straight through flights places I'm going. Let's dig into the fund itself. So this is a Scion Grosvenor infrastructure fund.

Tell us about the structure of this fund, because I guess for a lot of advisors and retail investors, the great thing is, is that now there's more of these evergreen funds. It's easier to invest in this. Is that the type of structure we're talking about here? That's right. So this is a structure that we've seen in a number of places. It's relatively new, but it's not unique. So a lot of investors are very focused on allowing retail to access infrastructure.

And so we're using this structure with our partners at Scion to do just that. We were very fortunate. We brought in an institutional anchor who allowed us to seed the vehicle with over $300 million of capital. We come to market with a portfolio fully seeded of over 50 assets. And that's something that is very tangible.

to the RIAs and the potential clients that want to access this portfolio. So if we rewind all the way back to the beginning of the conversation, people can see the portfolio and they understand that we own a little bit and they will own a little bit of JFK and they'll own a little bit of LaGuardia.

And if they've ever been to London, they're going to own a little bit of the M25, which is the ring road that runs around London. And we are about to close an investment into Heathrow Airport. So there has been some negative headlines in the newspapers lately about the mismatch of liquidity that wants to come out versus available liquidity in the fund. Similar to real estate,

LaGuardia is not exactly a liquid investment. I think that most people understand that, but when the rubber meets the road and you want your money out, okay, well, there are rules. So is this an interval fund? Is it something different? What does liquidity look like? And what are your minimums on this investment? So this is in fact an interval fund. Minimums as low as $2,500. And what we're looking at from a liquidity perspective is

is we're looking, you got to have an RIA to come in, at least initially, but we have a ticker, right? So easy to track. We strike a daily nav and we're providing quarterly liquidity of up to 5%. So barely semi-liquid. So for people that are listening and thinking about whether it's this or a separate interval fund, just think of it as you can't snap your fingers to get your money back. And in fact, not only can you not snap your fingers to get your money back,

If there is a negative headline or whatever, and everybody wants their money back, okay, you will get yours pro rata up to 5%. That's right. That's right. And I think that's typical across the board. Not an insurance product. Nobody's guaranteeing full liquidity. It's just difficult. This is long-term. These are long-term investments. And what, again, I think you'll see is because of the nature of what you're investing in,

you shouldn't have the same level of volatility that you'd see across the market. All right, so let's talk about that. So I would agree with the statement that all else equal, I would assume an airport, if it were to be marked to market daily, would be less volatile than, say, Palantir, the stock. I mean, obviously, right? Of course. It's a less volatile business. The cash flows are more predictable. Sure, there's seasonality, but you know all that.

But there is a lot of questions on the marks, on the NAV. When you see some of these go literally up and to the right with zero interruption, it does raise a little bit of eyebrows. Like, okay, what's happening here? So talk to us about the NAV. Like how much does it fluctuate? Where does it come from? How does that all work? So again, I think you'll see different answers from different structures, from different types of investors. For us, at the end of the day,

we're going to exit the assets. We think that's the best way to produce return for our clients. And so we're typically underwriting four to seven-year holds. And in doing that, we actually think what you will see, and if you look at kind of the track record of our investments, what you'll see is we are getting out and we can show an actual realized rate of return

as compared to just simply striking NAVs that are consistently up and to the right. So you're having liquidity events. So we are having liquidity events routinely. There's a, like I said, there's a ton of these interval funds now out there for different asset classes, infrastructure, private credit,

private equity, all these things, there's more options than ever to invest in private assets. And Michael and I always talk about how our inboxes are full constantly. So I'm curious, now that we have these fund structures that make it easier for people, and you said this is already a full up, it's not like you're waiting to see what the investments are. The investments are in the fund, right? It's not that old structure of we're going to do a capital call every time it's time to buy something. You have no idea what they're going to be.

How do you stand out from the crowd when there are all these pitches for private credit and private equity and look at the yields we get on this? And how do you stand out as an infrastructure just across all private assets since there's so many more options these days? Yeah, I love that question because, right, if you can't answer that question, you're out of business. So for us, there's a couple of things here I think that are quite unique about what we're doing. One, when you look at infrastructure again,

relatively young asset class, not a lot of folks that have exposure. So that's a way to stand out relative to private credit, relative to private equity, or anything else. This is an area that very few investors currently have in their portfolio, unless you're a big institutional investor. So there's a great opportunity to give people access to infrastructure. So that's the first kind of

frontier that we have to clear. Then what happens is let's compare ourselves to some of the other infrastructure products that are out there. And principally, there's three ways to access infrastructure through an interval fund. One is you have the big guys that are control investors. They are single sponsor investors sourcing their own deal flow.

Take your pick, whether it's KKR or Brookfield or anybody, they're all terrific managers. We work with many of them, if not all of them. But if you're in their fund, what you're getting is all their deals. So that's one example. We're going to be much more diversified than a structure like that because we can work with the entire market. On the other side, you have the guys that are accessing infrastructure through secondaries.

And so what they're doing is they're buying LP interests in a variety of different funds, highly diversified. But I've got two issues with that approach. One, a much higher fee load, right? Because that fee load is going to take into consideration the product itself and the underlying sponsor. And when you think about what's happening late in the life of a fund,

and you think about the assets that you have, two things are true. One, we used to do a lot of multi-asset secondaries. And when we did, we were seeing 20% discounts. Those days are gone. There's so much capital chasing these multi-asset secondaries.

But the placement agents will tell you discounts range from 5% to 7%. So there's a lot more of this trading going on in the secondary market. It's a much more liquid market than it's been historically. Which is, I guess, good for LPs, right? It's great for the LPs. It's just less attractive as a buying opportunity, right? The other issue that I have with it is think about what's left in a fund late in its life. Usually the most challenged assets, right? The good stuff you sell quickly because you can't.

And the stuff that isn't out is the stuff that you need to either fund more or it needs to be worked harder. And so that doesn't mean- So from your perspective, you're not into that stuff. Not into that stuff. I mean, look, we leave room in case we see something we fall in love with.

But by and large, we expect this to be virtually no portion of the portfolio. So Scott, we mentioned earlier that there's, let's just all say barely any liquidity. You should not go into this thinking that there is liquidity. On the flip side, you as managers do have money coming in.

How does that get put to work? Because I think you would argue that there's not necessarily a great deal to invest in every day. How do you let the cash build up? Like, how do you put it to work? What does that process look like? Well, this again, you know, I'll take these two questions together because it's the end of the last question and it goes into your question, Michael, which is where we sit is we sit at the asset. And so we're more diversified than the control investors.

And we're more specific about our approach than the multi-asset secondary investors. We underwrite every single thing we invest in. The beauty of that is twofold. One, we think it puts us in a very strong position to outperform. But two, nobody's doing more deals than us in the market year over year. What does that mean? It means your control investing manager is acting just like you said, two to three to four deals a year max.

Your multi-asset secondary guy may be entering into 20 deals a year, but it's through two fund investments. We're going to do anywhere between 12 and 18 individual investments every year. We're doing one to two deals a month. We always have something that we can invest the fund in. It's just the nature of the way the deal flow works. When we built this, we had to think about two things. One, managing to the liquidity.

and managing to the overarching regulatory regime that we're operating under. And what that does is it means, one, you've got to have about 10% of the fund that's invested in something highly liquid.

call that treasuries, call that a money market, et cetera, but something to help you manage that quarterly liquidity piece. All right. You mentioned net. Let's talk about fees. As an investor, I care about both. I care less about fees when I'm looking at the net, but obviously fees are a big component of alternative investments. What do they look like in this structure? Yeah. No carried interest in this structure. Again, just keeping it clean, making it kind of a traditional regulatory, simple structure

fee structure. So you're going to have about 160 basis points of fee exposure and then an expense load that goes along with that for administration. And the expense load, is that a one-time fee or is that annual? It's annual. It's things like the audit. It's things like administration of the fund and things like that. So there is a little bit of a load there. We think at the end of the day, the fee load, the fee and expense load isn't going to be any more significant than

then our closed-end vehicles is just going to kind of be administered in a different way because it's more annual and less on the back end. Okay, for financial advisors who want to learn more, where do we send them? For financial advisors that want to learn more, Scion has all this material on its website, and then certainly they can reach out through GCM as well. Perfect. Thanks so much, Scott. All right. Thanks, guys.

Okay, thank you to Scott. Thanks to Scion. Remember scioninvestments.com to learn more and email us animalspirits at thecompondews.com.