JONES DAY TALKS®: Real Assets Roundup Episode 1: A New Look at Real Estate, Energy, and Infrastructure

In six years of JONES DAY TALKS® Programming, we've brought you both standalone episodes focusing on a particular topic, and also podcasts that are part of a series of discussions on subjects that warrant extended deeper dives. Today, we're kicking off our real estates roundup in a multi-episode format. Partner Brian Sedlak will talk with Jones Day lawyers about all things real assets related. In this introductory discussion, Brian talks with partners Vic Irani and Kit Rockhill. Questions include, what are real assets? Why are investment funds focusing on real assets? And why is this important for investors, lenders, sponsors, government authorities, and other parties. Other podcasts planned for the series will focus on digital infrastructure, ESG, alternative energy sources, logistics, and other timely topics. Stay here and subscribe to the series. There's great information on the way. I'm Dave Dalton. You're listening to JONES DAY TALKS®.

Brian Sedlak:

Okay, welcome to JONES DAY TALKS®, the real estate roundup. For those of you who don't know, Jones Day is an international law firm with 40 offices and about 2,500 attorneys. I'm Brian Sedlak. I'm resident in Jones Day's Chicago office. I'm co-head of the real estate and energy transition and infrastructure practices. I started life as a real estate lawyer, but as the investor market has evolved, my practice has also evolved along with it to become a real assets practice, and now I cover real estate, energy and infrastructure. And by this podcast, we hope to accomplish a number of things. One, we want to cover the spectrum of real estate assets on a global basis. We also want to include a deep bench of specialists from around the globe to talk about real assets, and we hope to stay topical and cover things like digital infrastructure, energy transition, ESG P3 and district energy. But today is an introduction to the podcast and real assets. So with that, joining me are Vica Irani and Kit Rockhill. Vica and Kit, why don't you introduce yourselves, Vica?

Vica Irani:

Sure. Thanks Brian. And it's good to be here for our first episode. So my name is Vica Irani. I have been with the firm for 27 years now, resident in its London office. I co-chair our corporate practice globally, but over the last 15 years or so, my practice has really focused on infrastructure, energy, industrials in the M&A and private equity space. So I've watched the market evolve over the last decade, decade and a half, and have seen how the real assets world has gotten more interesting in some ways, more challenging in others and always fun.

Kit Rockhill:

All right. Well, hi, I'm Kit Rockhill. I am also excited to be here for our premiere episode of the real assets roundup. I am a resident in our Houston office, and so unsurprisingly, I'm a partner in our energy practice and co-heading the Energy Transition Infrastructure Initiative with Brian and Vica. And I started in the energy space when you really had a lot of M&A activity in shale and the Shale Revolution, the explosion in the Permian and the other shale plays in the US. And so a lot of my practice, being an energy lawyer and being a transactional energy lawyer, was related to the buildup of that midstream infrastructure in order to be able to service all of the oil and gas that was coming out of the shale plays. So I started doing infrastructure projects as a young attorney and I have also seen like Vica, how it's evolved over the last 10 years or so in terms of the infrastructure being brought in, to more energy transition projects being brought in and co-located projects and the way they're all blending together. So it's a very interesting topic to talk about.

Brian Sedlak:

That's great, thank you both. Kit. Why don't you describe real assets to our listeners?

Kit Rockhill:

Sure. The easiest way to think about real assets is there's something real. You can touch them, you can see them. I'm not going to recommend you taste them, but it's anything from an airport to your grandfather's watch. Anything you can feel and hold is a real asset, and that's where they get their value, which is the important thing to remember when you're thinking about real assets, is that the physical qualities that they have drive the value and the utility that they present to the market and to their users and customers.

Brian Sedlak:

Can you give us some examples?

Kit Rockhill:

Happy to give you some examples. So some of them is your typical infrastructure projects that you're thinking about. You're thinking about your roads, your bridges, your railways. You're thinking about your airports. If you're from the DC area, like I am, you're thinking about your toll roads. Then there's also what is more thought of as critical infrastructure. So your power plants, your water treatment facilities, your landfills, waste management. A third category is the digital or communication infrastructure. This is what you think of as cell towers, the power lines, they're running through your backyard. Your data centers are a new realm of that that are really starting to become more and more popular, but that also used to be your large server farms where you saw with the bloom of the internet as well. And then you have your traditional renewable energy projects, your wind, your solar, your waste to energy panels, so solar panels on your house, wind turbines that you see driving across the country. And then your natural resources, the stuff that actually flows in the energy space.

So you're talking oil, you're talking gas, you're talking the propane that you hook up to your grill outside. Anything that's a commodity and it's everything related to that. So that can also be farmland, it can be corn, it's the pumpkins, it could be everything down to with the rise of homesteading, your vegetable garden in your backyard. All of that is real assets.

Vica Irani:

Can I just say, Kit, I would love to do an M&A deal involving pumpkins. I didn't actually think that was a possibility right now, but I would absolutely love to do a pumpkin-based infrastructure deal of some kind.

Brian Sedlak:

Plenty of time.

Kit Rockhill:

It would be great.

Brian Sedlak:

Plenty of time to do that, I think. I'm sure if anyone can do it, you could do it. But Kit, you mentioned renewable energy projects. Maybe you can talk a little bit about the link to energy transition and how it plays into real assets.

Kit Rockhill:

Sure. So one of the things that we saw is when shale started to explode, we had a lot more oil and gas and so that made your traditional hydrocarbons a lot cheaper. That also was around the same time that you had a lot of concern about climate change. And so there was a lot of talk about, "How do we reduce our carbon footprint? How do we bring the carbon footprint of those projects down?" So you started to have some of this as, "Well, maybe we'll look at wind or solar power. Maybe we'll look at some of the waste to energy or renewable fuels." And a lot of that technology was really nascent back about a decade ago. It's not anymore. It's established. And so it's just exploded over the last 10 years especially because if you do want to transition away from a carbon-based economy, you need electricity for that.

That requires electrification. And if you're going to try and greenify the grid, I don't know if greenify is a word, but we're going to go with it. If you're going to try and greenify the grid, you need wind power, you need solar power, you need battery power. And so a lot of those projects have just started exploding, especially being co-located, meaning that they're tied onto something else. So you're using wind or battery to supplement what you're doing for a natural gas power plant, or you have a wind turbine that's being used to make your drilling rig more efficient so that you have to use less power as you're getting new oil and gas out of the ground. They're becoming their own standalone economic driver as opposed to just being used as part of the climate transition, and that's the big change we've seen over the last 10 years.

Brian Sedlak:

Okay, that's helpful. Vica, in the UK and Europe, in terms of energy transition, you guys seem to be a little bit ahead of us in terms of prioritizing reducing carbon emissions. Can you tell us whether that is indeed a priority in the UK and Europe? Maybe talk a minute about that.

Vica Irani:

Sure. Look, I think the short answer is yes, and I think despite our recent change in government in the UK, it remains a key priority and the race to net-zero is something that's very, very firmly on the policy agenda. I think across Europe, net-zero is a significant priority that is unabated, and I think these projects are almost morphing away from being philosophical or political priorities and are also just becoming incredibly mainstream. From a returns perspective and energy security perspective, there is a huge energy need. There's a huge energy need today, and even if you take 10 or 20 seconds to glance at the projections over the next few years, given the demands of AI, et cetera, et cetera, that's only going in one direction. And so in part, it is a priority because of the net-zero considerations.

In part, it's also just a priority because of energy security and the sheer scale of demand and projected demand. So I think the kind of energy transition-related projects that we've been seeing over the last few years are here to stay. Now, that's not to say that as technology continues to evolve, we won't see some technologies fall in and out of favor depending on circumstance, returns, reliability, et cetera. So wind and solar are pretty mainstream at this point, but we've certainly seen hydrogen dip in and out of favor. Again, newer technologies gain in popularity and then struggle to find funding, et cetera. And so I think that will continue in some respects in the UK and Europe for some of these technologies.

We seem to be going back to where wind and solar were 10, 15, 20 years ago in terms of the nascent sea of them. And so I think energy transition is a huge tent. There are some very established technologies and projects and others that are still very much at the emergent phase.

Brian Sedlak:

That's helpful. As long as you're on a roll there, why don't you tell us why any of this matters? Why is it important that assets are being recharacterized as real assets, and how is that important to the investing and financing community?

Vica Irani:

Sure. I mean, often this sort of fairly eclectic grouping of real assets and infrastructure come together because they share some common characteristics, and because they share some common themes that are relevant from an investing perspective. Generally speaking, and this is a generalization because as things evolve, I think what we've been finding is that actually all assets and all our asset classes that get put into the real asset or infra bucket actually don't share all of these characteristics in the way that they maybe did 10 or 15 years ago. But generally speaking, infrastructure assets are tangible in nature. Now, that may not always be true if you've got a concessions-based business, but by and large, there is a kind of tangible asset there. They tend to be predictable in terms of revenue streams, and that's often the most defining characteristic, that foreseeability, predictability of long-term revenues, resilient from an inflation's perspective, generally viewed as being more in today's world, more tariff resilient.

Again, not always true, but generally viewed that way. Often high barriers to entry, whether regulatory or from an asset perspective. Difficult to break into, sometimes in a monopolistic position, often highly regulated, often capital intensive of the capital needs. And I think one of the things that we've seen, as investors continue to chase returns candidly and as some of these asset classes are emerging that are more of a hybrid, we've seen a blurring of the lines. Or in terms of the Venn diagram of assets that would be considered by a real estate fund, an infrastructure fund, a traditional private equity fund, and an energy transition fund, that bit in the middle with the overlap has grown and would certainly encompass things like data centers, which 10 years ago would probably have been viewed as a real estate asset. Now, in some cases, most of the value may be derived from actually the access to power and the grid and are being thought of more in that energy and infrastructure space.

And so we've seen different investors either coming together, including from within a single sponsor, pooling from different funds, and also, we've seen a sort of, I don't quite know how to put this, but an expansion of that traditional core plus infra to expand to cover assets that traditionally don't really fall into the sweet spot of true traditional infrastructure. And partly that's a returns play, and partly it's a recognition of different opportunities, that has implications. It has implications when funds are thinking about things like incentivizing management teams. What you need to do to incentivize a management team for an operational business, maybe a hospital or a waste management business, is very different to the way you'd traditionally incentivize a management team of a regulated utility. And so I think funds are having to grapple with quite a wide variety in terms of the appropriate metrics, the different characteristics, and what it means to own different assets that all fall into the real assets bucket, but are actually quite varied in terms of underlying characteristics.

Brian Sedlak:

Yeah, that's very helpful. And it is a shifting definition, as you pointed out, oftentimes the tangible nature is talked about as a characteristic, and that holds until then the first reference to lottery concessions. And I think you pointed out. But there has been a continued blurring of lines, and I always use the example of 10 years ago we were involved in a lease back communication towers, and if you look at the trade press from back then, that was clearly characterized as a real estate deal. But we did part two of that transaction last year, and it was clearly then characterized by the trade press as digital infrastructure. And we're seeing the same thing in single-family residential, student housing, district energy, healthcare from a social infrastructure perspective, and I even have a friend who runs an infrastructure fund and they purchased a luggage cart business, so at the airports where you put in your credit card and you get a luggage cart, and they define that as infrastructure.

So I always say, "Excuse me, sir, your bag is resting on my infrastructure." But that's an outside example that we've begun to see, and the way that infrastructure funds define these things is different and it's varied. I was on a call with a residential fund earlier this week and they were drawing the lines on campus housing as to whether the units were on campus, then they'd be infrastructure, if they were off campus, then they'd be real estate. But I think the market continues to shake out. And look, as you said, your example of digital infrastructure, oftentimes those assets are held by both infrastructure and real estate funds. So there is a combination and nexus of all things coming together. Kit, do you have further examples of some hard based tangible infrastructure you've been involved in recently?

Kit Rockhill:

So I think you're right about the blurring of the lines. And a good example of that, I think, is what you think of when you think of like LNG terminal and facilities. So you used to have, I did an oil and gas deal, I did a renewables deal, I did a real estate deal. And that's kind of all blurred into one if you look at what's happening with an LNG facility. Because you have pipelines and natural gas coming in, you having it being cooled and liquefied, that's traditional oil and gas. Well, what if you're having renewable natural gas coming in? What if with the reclassifications you have renewable energy credits or you have tax incentives you can do, a lot of the LNG facilities now have collocated hydrogen producing units. If you have hydrogen, all of a sudden you have renewable hydrogen or you have blue hydrogen, and then all of that is getting exported.

So it's a traditional port deal too, you're putting it on a ship and you're shipping it out over the world. So you're dealing with port use things that are then applicable. If you're doing anything from charcoal to shipping in the toys and the dolls that we're going to have for Christmas, it all ends up being the same kind of concept that you're seeing and one project is going to have all of those components in it. And so you're going to have the renewable piece, the energy piece, the real estate piece, the infrastructure piece, maybe the poor piece, and you have to understand how they work together in order to be able to actually live in the world as it is today, because nothing is ever black and white or that cut and dried anymore. Everything's blurred together in a big, giant gray mix.

Brian Sedlak:

And that's a great example, and that's one of the reasons I really like the practice. I know the three of us talk at least on a weekly basis, and the projects that we do involve everything from energy, to corporate M and A, to PEE, to construction, to supply deals. But I think we spent a good deal of time referencing digital infrastructure today, and I think that's an important area to discuss and drill down a little bit more on. And when you read the headlines, the headlines are full of references to data centers and the need for data centers, which is partially driven by AI, and it's interesting that we've had a lot of references today to the importance of digital infrastructure in terms of the real assets discussion. It's a great example. Data centers and digital infrastructure are in terms of how everything's coming together in the real assets world, from capital investment, to financing, to energy needs.

So maybe we should spend the next few episodes talking about digital infrastructure on the real assets roundup, because really does touch everything from the data center side, to the energy side, to the supply side. And so I think it's probably worthy of a multi-part digital infrastructure series, so join us next time on the Real Assets Roundup as we focus on the data center landscape. And for more information, please see the show notes and please subscribe to this podcast to get special subscriber access to episodes. So this wraps up episode one of the Real Assets Roundup. Thanks for joining.

Dave Dalton:

For contact information and complete bios for Brian Sedlak, Vica Irani and Kit Rockhill, go to jonesday.com. Subscribe to JONES DAY TALKS® at Apple Podcasts, and where else you find your podcast material. Thank you again for listening. I'm Dave Dalton. We'll talk to you next time.

Thank you for listening to JONES DAY TALKS®. Comments heard on JONES DAY TALKS® should not be construed as legal advice regarding any specific facts or circumstances. The opinions expressed on JONES DAY TALKS® are those of lawyers appearing on the program and do not necessarily reflect those of the firm. For more information, please visit jonesday.com.