INFRASTRUCTURE INSIGHT

Year 2022 is a milestone year for our firm. It is the final year of our first 5-year visioning exercise.

In 2017, we established a 5-year vision for the firm. We also articulated our core values: People, Excellence and Growth. In that 5-year period, Fengate’s gross asset value grew from $13 to $35 billion supported by over $7 billion of equity commitments across our three platforms.

After starting with a single P3 investment 16 years ago in Ontario in year 2006, our infrastructure platform has grown to become a recognized developer and investor of North American, mid-market assets. Today, we have a team of more than 60 people located in seven cities and 48 investments across 21 states and provinces.

These 48 investments represent more than $20 billion of enterprise value and $3.2 billion of third-party commitments, invested through two platforms: (1) our closed-ended Core+ funds, and (2) our open-ended Core fund. In year 2022 we invested over $650 million in six new assets across these two strategies.

We are now looking ahead to Vision 2027, our next five-year strategic plan. We have set ambitious goals, and we expect to double our assets under management by year 2027, with most of our investment activity taking place in the United States.

In 2017, we launched Fengate Infrastructure Fund III (“Fund III”) – our mid-market, U.S.-Canada, Core+ fund with capital commitments totaling $1.1 billion.

Our Core+ infrastructure strategy is characterized by a focus on assets in the energy transition (wind, solar and storage), social, transportation, and digital sectors in United States and Canada. The strategy seeks to invest in assets where cash flows are largely contracted and targets a net IRR between 11% to 13% and a yield of greater than 5%.

Early in 2022, we launched Fengate Infrastructure Fund IV (“Fund IV“) with a target size of C$1.5 billion (US$ $1.2 billion). Fund IV will pursue an identical strategy to that of Fund III with a greater focus on U.S. assets and greenfield projects. Today we have raised over $800 million of capital and have invested circa $500 million in four investments.

In late 2020, we launched our Core strategy, Fengate Infrastructure Yield Fund (“Yield Fund”). Yield Fund was seeded with a portfolio of 24 assets, representing $720 million of invested capital, and since inception has grown to 29 investments and $1.2 billion of invested capital. This strategy is focused on investments in high-quality, long-useful-life infrastructure assets with revenues underpinned by contracts or favorable regulatory regimes. Yield Fund seeks to invest in mid-market Brownfield assets requiring less than C$200 million of equity, that have a strong operating track record and stable income stream within the social, transportation, energy transition, and digital sectors. Yield Fund is forecasting a 10-year net IRR of over 7.5% and current cash yield of over 6%.

The seemingly robust post-Covid global economic recovery has ground to a halt. For the first time in decades, inflation has returned as a serious problem in developed markets. In response, interest rates are rising around the world. Europe is facing power rationing and China continues to impose lockdowns resulting in ongoing supply-chain insecurity. Recession appears on our doorstep across many of the world’s leading economies. This barrage of bad news dented confidence in both public and private markets in 2022. Yet fundraising data shows that investors are still hungry for infrastructure assets. 2022 was a record year for infrastructure fund flows with over $100 billion raised for infrastructure funds. ​​​​​​​

​​​​​​In our opinion there are three macro forces at play:

1. The impact of geopolitics on global capital flows;
2. Inflation and its effect on interest rates; and
3. The economy and government fiscal policy.

Geopolitical conflict and instability – Ukraine-Russia, China-U.S. – is currently showing up in two ways in our space. One, capital is moving to safer jurisdictions, namely the United States, as it seeks stability given global turbulence. And two, it is no surprise that core infrastructure continues to attract the lion’s share of investor commitments. Capital raised for core funds targeting U.S. investments in the first half of 2022 reached $30 billion, surpassing year 2021’s full-year total.

Despite the rise of interest rates, valuations of U.S. and Canadian infrastructure assets remain stubbornly stable. We are not observing significant increases in discount rates on core assets. And why is this? We think a big reason is infrastructure fundraising has created an over-supply of capital for U.S.-core assets, which needs to be invested over the next 12 to 24 months before any material upward movements in discount rates materialize.

One of the main narratives surrounding infrastructure over the last decade went something like this: in a never-ending period of low interest rates, investors who couldn’t get yield from fixed income turned to infrastructure as an alternative – with its low-risk profile and stable, long-term cash flows. Per Infrastructure Investor the tagline was “Come for the yield, stay for the diversification”. And it worked. However, for obvious reasons, it’s not quite the selling point it used to be. Infrastructure, fortunately, has more to offer. Today we are dusting off an older narrative. I’m referring to infrastructure’s ability to hedge against inflation. Infrastructure’s inflation fighting superpowers are now the new selling feature in this high inflationary environment. Then there is the economy. Many expect a recession will materialize over the next few quarters. This should create a decrease in business and local government spending and slow down infrastructure development. Thankfully, the U.S. federal government has come to the rescue with its ability to legislate fiscal spending backed by its magical powers to create money.

Upon its signing, the Inflation Reduction Act became the most significant legislation for climate action by U.S. Congress in history, allocating $385 billion towards energy and climate spending. The U.S. federal government’s goal is to reduce emissions by 40 percent below 2005 levels by year 2030. It’s an impactful piece of legislation as it will drive significant growth of energy transition projects for the next 10 to 15 years. Together with the $1.2 trillion Infrastructure Investment and Jobs Act, this caps off a year that started with serious doubts as to whether these two bills would pass leaving the United States stuck on fossil fuels. These legislative successes provide the foundation for the next 10 years of U.S. infrastructure investing.

So, how does one play this extraordinary opportunity? Our approach is to rely on our developer DNA and in-house Asset Management expertise. We will continue to create value by developing, building, and optimizing core+ assets and moving them to core in our Core+ Funds. And in our Core strategy, we will continue to invest in long-useful-life infrastructure assets with revenues underpinned by contracts or favorable regulatory regimes. In addition, we will seek to enhance value of core assets through asset optimization. We remain focused on sectors we know, including transportation and social projects, wind and solar power generation and low risk digital assets. ​​​​​​​

Another big part of our strategy is our approach to portfolio construction. For us, portfolio construction is a science and not an art. By way of an example, when we started Fund III our analytics team created the ideal portfolio with target allocation percentages across our three sectors, two geographies, greenfield and brownfield assets and three levels of contracted revenues: high, medium, and low. We then used this ideal portfolio to guide our investment activities for the purpose of optimizing risk and return and we will continue this approach in Fund IV.

This approach allowed Fund III to perform above its target return through a global pandemic. And will also allow the fund to confidently navigate today’s challenges of rising inflation and interest rates, high energy prices and other unknowns.

In our Core strategy, Yield Fund boasts a diversified portfolio of 29 assets, with no single asset representing more than 15% of the portfolio. The portfolio is currently invested 65% in Canada and 35% in the U.S. and is well diversified across our target sectors. Despite the challenging conditions in 2022, yield fund performed as expected, providing investors low volatility and strong cash yield. Going forward we will continue to diversify the portfolio with a goal of no single investment exposure greater than 10%. In addition, we will seek to increase the Fund’s exposure to real returning investments.

We believe there are strong tailwinds across our target sectors.

In transportation and social infrastructure, we remain bullish about the U.S. market and are actively tracking its progress. Our Core+ strategy will benefit from several themes, such as, electric vehicles, the 2028 Los Angeles Olympics, and the renewal of aging transportation infrastructure in general. Our Core strategy will pursue investments meeting the fund’s objective of essential infrastructure assets, supported by long-term or regulated contracts with a stable, consistent cash yield.

In the core+ space, several U.S. availability based P3s closed in year 2022, notably DC Street Lights and Clackamas County Courthouse, but we are also seeing an increased number of opportunities in projects developed outside of traditional government procurement processes. These projects will allow us to use Fengate’s build-to-core expertise to create investor value. The Canadian market for investment in transportation and social infrastructure remains slow, as many projects are being procured without the use of long-term private capital.

With respect to energy transition, as previously mentioned the Inflation Reduction Act is a game-changer and Fengate is well-positioned to take advantage of these immense tailwinds. Let me list a few of the provisions in the IRA we are most excited about:

• Tax credits for wind and solar projects have been restored to their full rates for projects put in service over the next 10 years: from year 2022 until 2032.
• The investment tax credits and production tax credits for wind and solar projects can increase by an additional 20% due to bonuses for domestic content.
• For smaller projects up to 5 MW, the 30% Investment Tax Credit (or ITC) could reach as high as 70% due to additional bonuses for assets located in low-income communities.
• Production Tax Credits (or PTCs) can now be claimed on solar projects versus just being eligible for the ITC.
• And the IRA provides a new 30% ITC for standalone battery storage projects.

Finally, projects will be allowed to sell tax credits directly to other companies. Our Core+ approach is to continue to get involved in late-stage developments underwriting equity at greater than 10% returns and selling this equity below 10%. In Core, we will acquire stabilized renewable investments located in competitive power markets.

In digital infrastructure, while valuations have pulled back from all-time highs seen in late 2021 and early 2022, significant macro tailwinds including increased mobile data, streaming consumption, and 5G deployment have increased demand for bandwidth, storage, and connectivity. Broad 5G adoption by all U.S. mobile carriers will result in more colocation and new-build cell towers. U.S. tower inventory is currently growing at approximately 14% per year. While U.S. data center vacancy remains at historical lows of 4.4%. Fiber-to-home projects are experiencing strong growth due to U.S. federal government subsidy programs that support universal broadband availability.

Digital investment opportunities in Canada remain limited outside of the data center sector. Only 2% of cell towers in Canada are privately owned and fiber opportunities are limited and dependent on uncertain subsidy regimes.

At the core of our purpose and vision is our long history of investing in sectors that align with our investors’ environmental, social and governance objectives.

Our assets improve lives by providing hospital beds, courtrooms, and schools, and by generating clean power and displacing CO2. This is something we are very proud of. Every year, we complete an ESG Monitoring Assessment to evaluate and update the ESG factors impacting each investment. We also measure greenhouse gas emissions and report on carbon-related performance metrics.

Based on our history, we want to continue our leadership in ESG, and we are committed to continuous improvement, with the goal of providing our investment partners with decision-useful reporting.

Our people have always been our greatest asset. Despite the challenges of the past few years, we have grown our team to 190 strong. More importantly, our people feel connected to the firm and view Fengate as an inclusive workplace.

In our 2022 employee survey, our overall engagement score was 90% and our diversity and inclusion was even higher at 96%. Both of these scores are well above industry benchmarks.

Our focus on people has driven Fengate’s consistent recognition as a great place to work.

We are very proud to have built a strong team of talented individuals across the firm.

At the executive level, Nina Yoo became Chief Financial Officer in September. Nina joined Fengate almost 14 years ago and before her promotion she was the Head of Infrastructure Asset Management.

​​​​​​​Patrick Freer has taken over from Nina as the Head of Value Creation and Asset Management. Andrea McLean, Brendan McNulty and Brandon Tracey were recently promoted to senior roles on this team that is now 40+ strong.

We’re delighted to continue to support the development and growth of our people.

As we stay the course through these turbulent times, I’m excited about the opportunities ahead and the significant tailwinds supporting our business. We have a highly engaged and talented team that is focused on exceeding our investors’ objectives and improving the world through our investments. We will continue to maximize value and protect the capital entrusted to us by our investors.

The information contained herein is in summary form for convenience of presentation.  It is not complete and it should not be relied upon as such.  The information set forth herein was gathered from various sources which Fengate Capital Management (referred to as “Fengate”) believes, but has not been able to independently verify and does not guarantee, to be accurate. ​This information is provided on the understanding that, as an accredited investor, institutional advisor, other advisor or potential partner, you will understand and accept its inherent limitations, you will not rely on it in making or recommending any investment decision with respect to any securities that may be issued, and you will use it only for the purpose of discussing with Fengate your preliminary interest in investing in a transaction of the type described herein.  Any investment in infrastructure and real estate is subject to various risks; such risks should be carefully considered by prospective investors before they make any investment decision.  Any prospective investor should consult its own advisors as to legal, tax, accounting, regulatory and related matters before investing.​ These materials may contain forward-looking statements based on experience and expectations about these types of investments.  For example, such statements are sometimes indicated by words such as “expects”, “believes”, “seeks”, “may”, “intends”, “attempts”, “will”, “should”, and similar expressions. Those forward-looking statements are not guarantees of future performance and are subject to many risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual returns could be much lower than those expressed or implied in any forward – looking statements as a result of various factors.  Fengate has no obligation to revise or update these materials or any forward-looking statements set forth herein. The information in these materials reflects the general intentions of Fengate.  There can be no assurance that these intentions will not change or be adjusted to reflect the environment in which Fengate will operate.  Historic information on performance is not indicative of future returns.  Conclusions and opinions do not guarantee any future event or performance.  Neither Fengate nor any of its subsidiaries or affiliates are liable for any errors or omissions in the information or for any loss or damage suffered. ​These materials have been prepared solely for information purposes by Fengate, are confidential and are being provided to you on the express understanding that they will not be reproduced or transmitted by you to third parties without Fengate’s prior written consent.  If you are not the intended recipient of these materials, you are hereby notified that the use, circulation, quoting, or reproducing of these materials is strictly prohibited and may be unlawful.