Reichmuth Infrastructure on investing in European transport transformation

This article is sponsored by Reichmuth Infrastructure.

Swiss infrastructure investor Reichmuth Infrastructure was founded in 2012 as part of the broader Reichmuth Group, specializing in energy, transport and the circular economy. It was an early investor in rolling stock assets and last year launched a dedicated transport fund with a focus on Europe.

CEO Stefan Hasenböhler and Senior Investment Manager Roland Kaufmann say the key to success, especially in the mid-market segment where they prefer to operate, is to seek out assets that benefit from regulatory and macroeconomic conditions.

What macroeconomic trends are affecting investors in the transportation sector?

Roland Kaufmann: Four main trends influence the situation in the transport sector, two of which mainly concern the demand for transport infrastructure, and two others affect the supply in this segment.

On the demand side, the first and most important trend is population growth, which is of course one of the overall factors driving demand for infrastructure and therefore wise investment in it. This also translates to the transport segment as we see that more people will require more goods and travel arrangements, which will effectively lead to higher transport efficiency over time, both in terms of tonne-kilometers in the cargo segments and passengers traveled. As European transport infrastructure capacity is currently under high use, we see this as an important factor.

The second main trend is the modal shift, i.e. the shift towards greener modes of transport in the flow of goods and people across Europe. This has a strong positive political impact, encouraging a shift from road to rail. The EU is clearly focused on reducing greenhouse gas emissions by 90 percent by 2050, which includes a smart and sustainable mobility strategy.

On the demand side for transport infrastructure, we see two main megatrends, which are the tendency to renew/replace more and more outdated infrastructure, as well as the type of replacement with newer technology that effectively promotes the decarbonization of the sector.

Stefan Hasenböhler: It is also important to take into account the regulatory and political environment when assessing the segment. While the European Green Deal is indeed driving the decarbonisation of key polluting sectors in Europe, many investors are focusing on energy generation and distribution, making large investments in renewables, but it is also having a major impact on the transport sector.

Customers in the transport sector will increasingly demand clean transport solutions themselves, not least because they will also have to report greenhouse gas emissions and will be willing to pay for these clean solutions.

Transport accounts for 25 percent of greenhouse gas emissions in the EU, of which around 70 percent comes from roads. Much of Europe’s old transport infrastructure will have to be rebuilt, and we are already seeing this happening, for example in Germany, where a large-scale rail network renewal program is planned.

Also, when it comes to modernizing transportation infrastructure and considering the amounts required to do that, the question will be whether governments will have the required funds to do that in the future. Since we are seeing quite tight government spending right now, we see opportunities for private capital to fill the gap and provide the investment that is needed.

Which sectors offer opportunities?

RK: In the transport sector, we basically have four main verticals: rail, road, waterways and aviation. We focus mainly on the rail and waterways space, and we also look at some sub-sectors in the road and social aviation space.

While maintaining our focus on Central Europe as our primary geographic location, we are also expanding our reach towards Eastern European countries, where we see attractive grounds for renewing the currently installed base of transport assets, such as, for example, investments in rolling stock and leased equipment for new freight routes in towards the Red Sea and Baltic Sea regions, as well as the overall long-term increase in demand due to economic growth in the region.

Despite the broader definition of assets covered, we have a very rigorous selection mechanism to ensure the core characteristics of our investments, with the majority of the portfolio consisting of essential assets that generate visible and secured long-term cash flow.

For example, this filtering mechanism is currently the reason we do not invest in a sector such as electric vehicle charging, which typically carries a greater share of commercial risk with limited visibility of the stable residual cash value we would like to see.

In addition, we are always thinking about the risk of asset obsolescence in the longer term, given the evolution of ESG regulations in the fight against climate change. This means that we currently stay away from investing in new-build oil and gas railcars, as it is considered unlikely that their remaining useful life will correspond to the technical obsolescence age of around 40 years.

Shh: We are committed to promoting clean rail and water transport, taking into account the economic drag of these sectors, as well as the environmental benefits of switching to these modes of transport and lower greenhouse gas emissions.

We are also looking at opportunities where there is a sustainable or social aspect to aviation as we see advances in green fuel technology. This is an area where we need to educate investors to some extent to explain to them that transport must have a broader definition, taking into account its energy consumption and, even with cutting-edge technology, its emissions profile.

How enthusiastic are investors about taking advantage of these macro trends in the transportation sector?

Shh: Investor reactions can typically be divided into three different aspects.

The first thing I would say is that this type of investment is seen as an interesting way for investors to invest in the significant shift towards decarbonisation, which is happening mainly in the EU. That said, there are of course plenty of opportunities to do this by investing in renewable energy generation assets, but many investors are facing increasing exposure to renewable energy investments and see transport as an attractive diversifier with a strong need for capital expenditure in the coming decades.

Secondly, we always need to demonstrate to investors how we address and hedge GDP risk by investing in transport infrastructure. This is a fundamental part of our investment process as we do not typically anticipate undue exposure to commercial or GDP risk, but look for investment opportunities with long-term contractual or concession agreements.

And third, the main attraction for investors is that they are often under-allocated to the transportation sector. Historically, many have been too focused on energy. Many investors tell us they have a lot of renewables and are looking for a more satellite approach to broaden their exposure to infrastructure and at the same time capitalize on the decarbonization trend.

“Many investors are increasingly exposed to renewable energy investments and see transport as an attractive diversification”

Stefan Hasenböhler

What challenges do investors face in the transport industry?

RK: It is always a challenge for any transportation investor to understand what exactly they are investing in. Investing in a road is quite simple because you often have a general contractor and you know that in the end “a road is a road”. .

However, when you invest in rolling stock, for example, you can choose from a huge variety of different options. You can invest in locomotive leasing with country-specific packages, with different propulsion systems and different last-mile modules, and with or without GDP risk.

That said, and bearing in mind that we invest in assets with useful lives of 30 years or more, investors really need to understand the technology of the assets we are buying, what impact this will have on demand over the long term, and where the pitfalls are. It is important not to be fooled by cutting-edge technology such as a new hydrogen-powered train or locomotive. It would be very easy to go bankrupt by playing on exciting technologies in the transportation sector.

That is why it is particularly important for investors from the medium-sized enterprise sector to have very good knowledge of the assets they buy and to track the growth paths of the companies in which they invest. This should be approached comprehensively, but very carefully.

It is also important to keep up to date with technical market developments, which is why we participate in almost all transport conferences in Europe.

CII: I agree, understanding the assets you’re investing in is key, and transportation investors aren’t looking to invest in new technology in the same way that venture capitalists do. But it’s equally important to understand the management teams of your operating companies and ensure that they have a shared vision for the long term.

As an infrastructure investor investing in long-term assets, we need to share a common understanding that we are driven by long-term interests, not medium-term interests like private equity players focused on growth and asset flipping. We should be interested in serving them.

How do you see the future of transport investments?

RK: To understand the potential, we can compare the transport sector to the energy sector. In many ways, the energy sector is at the same stage of development as it was a few years ago. Although officially in place for many years, the level of liberalization is quite new, and there are far too many unprofitable and uncompetitive state-owned enterprises with declining market shares.

We saw something similar in the energy sector and it was only thanks to the involvement of private capital that this changed. I think the same will happen in the transport sector.

Shh: In the future, we will see a major transformation, or rather a transformation in the transport sector, and given the scarcity of government funding, private capital will play a very important role in this. This will be partly driven by regulators, but it will also be largely driven by public demand, as citizens increasingly focus on clean transport.

How do you deal with the challenges of sustainable development in transport investments?

Shh: The problem is that many modes of transport still depend on older assets operating on outdated technology or infrastructure. For example, non-electrified last-mile rail tracks require dual locomotives that carry diesel-based modules. Of course, such assets are still very beneficial from an ecological and socio-economic point of view, which is why we want to drive the transformation in this sector. Our new Article 8 SFDR fund does exactly that by decarbonising and innovating our rail and water assets, making them fit for future modes of transport.