NYC BAM’s Nikolova: ‘I really want to see an energy transition fund that is clearly infra’

The head of infrastructure at the Office of the New York City Comptroller’s Bureau of Asset Management has called on managers to express more clearly the risk in energy transition funds investing beyond just renewables.

Petya Nikolova, who is also the deputy chief investment officer for the system which oversees the investments of the Teachers’ Retirement System of the City of New York, New York City Employees’ Retirement System, New York City Police Pension Fund, New York City Fire Pension Fund and the New York City Board of Education Retirement System, would like to see managers delve more into the details around the risk of funds which incorporate energy transition assets such as hydrogen, carbon capture and EV charging.

Among the five schemes – which have a collective $264 billion of assets under management overall and $6.9 billion in infrastructure – commitments have been made to vehicles such as Actis Energy 4, Actis Energy 5 and BlackRock’s Global Energy and Power Infrastructure Funds II and III, although Nikolova believes risks in such vehicles are more clearly defined.

“We see a lot and a wide variety of strategies. Some of them are more renewables and some are more decarbonisation-oriented, have a variety of assets and not related to traditional infrastructure, but yet you have the decarbonisation theme,” Nikolova told Infrastructure Investor. “I still need to see a strategy that is very well-articulated in terms of the risk the strategy is taking. How is that different or similar to infrastructure? I really want to see an energy transition fund that is clearly infrastructure, that articulates clearly what the value proposition is and we can truly understand the risk and what makes it infrastructure. When you think about downside risk protection, sometimes in conversations that is not very well-articulated.”

Nikolova does not believe this is due to deliberate obfuscation from managers, but rather a symbol of the relative immaturity of this part of the broader infrastructure asset class.

“I think it’s a new space and everyone is trying to figure it out,” she explained. “How many years did it take for renewable energy to become more of a commodity? There are a lot of different technologies where even if you’re not taking technology risk, we want to understand what risk you are taking. The industry is trying to articulate what is it they are doing because the space is so vast and it’s relatively new.”

While the boards of the five pensions have divested from fossil fuels in the public markets, Nikolova said there is no such requirement on the schemes to do so with its infrastructure funds, other than to not invest in coal. Other US pensions, such as the Maine Public Employees’ Retirement System, are required by state law to wind down exposure in this respect.

“Stranded asset risk is very real, but we don’t have hard mandates not to invest and therefore it’s an economic decision based on merit,” she maintained. “But you see the issues playing out, so it becomes a higher threshold from an investment point of view. “

Mid-market yearnings

The NYC BAM infrastructure portfolio, built over the last 12 years and now with a 4-5 percent allocation across schemes, has typically centered on the large-cap managers in the infrastructure space, with several commitments over the years to Brookfield Asset Management, Global Infrastructure Partners, KKR, EQT and Stonepeak.

While mid-market commitments have been made too to the likes of Ardian, Basalt Infrastructure Partners and DIF Capital Partners, Nikolova wants to increase this side of the portfolio in 2024.

“We started about 12 years ago and the market was very different where you had a few funds. We had made the right choices and our partners have grown consistently over time,” she said. “That obviously creates white space. We recognised that trend and we started adding a little bit of mid-market funds over time and as our allocation increased, we started adding relationships. Our existing managers have been successful.”

While some characterise mid-market by deal size, Nikolova is viewing mid-market by a broad $3 billion-$7 billion fund size, with the hope of finding a differentiated approach to the large-cap space.

“It’s a different opportunity set that we see. Maybe the same sectors, but it is a different opportunity set,” she outlined. “As an observation, there’s potentially a little bit more room to negotiate bilateral transactions. In some of the large funds we’ve also seen pretty good bilateral dealflow too.”

NYC BAM’s aforementioned exposure to the likes of GIP, Actis, DIF and Basalt means it has been at the heart of the GP consolidation trend currently taking place across the infrastructure market. The New York investment manager’s exposure to both GIP and BlackRock means it is among the 5 percent of LPs with exposure to both managers in the infrastructure mega-merger.

Asked if the loss of independence from independent asset managers is a concern to her, Nikolova responded: “It depends on how things change and how you view the value of that independence and we will see how that plays out. What is independence? Is it culture or something else? I’m excited to see what happens. You need to evaluate when your partners come back to market and you are going to have a few years to see what has happened. If you valued culture or if you valued execution and entrepreneurship, how much is that still there?”