Ecofin’s De Lamaze: UK ‘most challenging’ market for utilities

Speaker 1 Welcome back to the Trust Show. Today we'll be discussing the Ecofin Global Utilities and Infrastructure Trust. Shares in the trust have rallied nearly 30% over the past year, beating the S&P Global Infrastructure Index and the S&P 500 and landing it back onto a premium. Joining us is the manager and former head of European Utilities research at Goldman Sachs, Jean Euve de Lamaze. Welcome to the show. Speaker 2 Thank you. Thank you, Alessi. Speaker 1 To start with, could you give us a quick summary of the strategy? Speaker 2 Yes. So Ecofin Global. Speaker 1 Utilities and Infrastructure Trust as the name. Speaker 2 Says focuses on global. Speaker 1 Economic infrastructure assets. Speaker 2 Only listed assets and it always prioritizes the the long duration. Speaker 1 Types of business models that we see in infrastructure, no industrial exposure, no equipment manufacturer very much focuses on. Speaker 2 Asset backed. Speaker 1 Services, which are the core of the infrastructure investment universe and keeping things big picture for now. What are some of the big structural growth drivers at the moment? I assume the big thing would just be unprecedented power demand. Speaker 2 Yes, indeed, we we're seeing. Speaker 1 Dramatic structural changes to the the world of infrastructure. Speaker 2 One of the catalysts. Speaker 1 For that is actually the dramatic capital expenditure requirements. Speaker 2 The world has. Speaker 1 Hardly invested in infrastructure in the past 50-60 years and is now in a situation where a large part of the infrastructure we use everyday has become obsolete and requires significant investment. Speaker 2 So that's the. Speaker 1 The the overall. Speaker 2 Catalyst within that what we are seeing is an. Speaker 1 Interesting inflection point in the consumption of electricity and power in particular. Speaker 2 With actually an overall electrification trend, development of electric vehicles also growing demand. Speaker 1 From AI data centres and. Speaker 2 These are really new trends after about 25 years of declining. Speaker 1 Demand for electricity in the UK, in Europe and actually across the world, it's been flattish in the US. Speaker 2 Over the past 25 years, but in the UK we consume about 20% less electricity today than in 2000. Speaker 1 That's notably and. Speaker 2 Particularly in the back. Speaker 1 Of efficiency gains and have you made any recent investments that were directly AI plays? Speaker 2 So we. Speaker 1 We always try. Speaker 2 Not to be. Speaker 1 Focused on only one investment driver. Speaker 2 Clearly, data centres. Speaker 1 Have played a big role in the past couple of years. Hardly so actually it's a fairly. Speaker 2 New phenomenon. And it's so far a phenomenon which has mostly. Speaker 1 Impacted U.S. stocks. Speaker 2 Much more than. Speaker 1 European or UK? Speaker 2 Ones. So it's still an. Speaker 1 Emerging theme. Speaker 2 We are definitely. Speaker 1 Seeing some companies. Speaker 2 Very well positioned to benefit from the long. Speaker 1 Term contracts. Speaker 2 To provide electricity over. Speaker 1 203040 years to the main tech companies. Speaker 2 For the use. Speaker 1 Of their data centres. Speaker 2 But the first? Speaker 1 Contract of that. Speaker 2 Type. Speaker 1 Was signed in February 2024 in Pennsylvania a company called Tannen. Speaker 2 Which? Speaker 1 Signed a a long term agreement with Amazon. Speaker 2 To provide. Speaker 1 Them with secure. Speaker 2 And carbon free. Speaker 1 Electricity, which is very much what data centres are looking for. So it is a driving theme. It's definitely. Speaker 2 Not the. Speaker 1 Only one behind our investment strategy. As you know, we, we, we are very much invested for the long term. We've been around for 10 years with the the trust and we very much intend to play all the themes that we expect to develop in the next decade, a couple of decades. And as I said, so shares have done really well recently, up nearly 30% over the past year. There was a little bit of volatility around the onset of conflict in Iran. Could you talk me through the decision to cut gearing and take profits around that time? Speaker 2 Yes, well, obviously EGL focuses on long. Speaker 1 Duration investments, we very much focused on long term performance and steady. Speaker 2 Regular performance, we also allow ourselves to be reasonably opportunistic and nimble in terms of geographical or sub segment. Speaker 1 Exposure of the portfolio. Speaker 2 What is true, and you highlighted it, is that we had. Speaker 1 Very strong months during the whole of 2025 and the beginning of 2026. Speaker 2 And when the the conflict? Speaker 1 In Iran exploded at the very end of February this year. Speaker 2 We took the. Speaker 1 Opportunity to take a lot of profits to an extent, which is very unusual for our strategy with EGL. Speaker 2 And we, we, we took almost 10% off our overall. Speaker 1 Exposure by reducing the gearing in the very. Speaker 2 First days of. Speaker 1 March 2026. This has helped us. Speaker 2 Going through this. Speaker 1 High volatility phase of of March and the the first weeks into that. Speaker 2 Conflict. Since then we have rebalanced the. Speaker 1 Portfolio Regain exposure by acquiring some of the high quality names on the Jeep after again the the the the the high volatility events of late February this year. Speaker 2 So for us, it's been, you know, a. Speaker 1 Difficult time. Speaker 2 Because of. Speaker 1 The the the. Speaker 2 Fast movements in the market. Having said that, it's allowed ourselves to grab. Speaker 1 Very attractive opportunities, so in. Speaker 2 The end the. Speaker 1 Use of gearing has proved helpful for us and in terms of what's related to conflict, in terms of what a higher for longer rate environment might look like for a trust like EGL. I've heard utilities spoken of as bond proxies and that high rates can tempt investors to reallocate into safer government bonds. Is that something that the portfolio suffered from when rates were going up back around 2022? Or was the bigger problem just utilities being a capital intensive debt laden sector? Speaker 2 So you're you're absolutely right to highlight that utilities are often. Speaker 1 Perceived as bond proxies, you know. Speaker 2 No growth. Speaker 1 Inflation pass throughs and you fluctuate depending on the long bond yields. Speaker 2 The beauty of being a specialist is that we know that this is a little bit. Speaker 1 Of a consideration of the past, there's been a a a. Speaker 2 Massive transformation of a lot. Speaker 1 Of those companies. Speaker 2 Development of non. Speaker 1 Regulated activities which are much more growth oriented rather than typical defensive bond proxy type of. Speaker 2 Businesses and and overall I I would say transformation of the companies plus. Speaker 1 Diversification of the investment universe has meant. Speaker 2 That we. Speaker 1 As a you know, a trust are much less dependent on short term fluctuations in interest rates than we used to. Speaker 2 Having said that. Speaker 1 Generalist investors, typically. Speaker 2 Would sell baskets. Speaker 1 Of utilities. Speaker 2 In periods of fast. Speaker 1 Steepening of yield curves. Speaker 2 So for us. Speaker 1 It's usually an opportunity, an opportunity which we we always try to to use to, to buy some of the. Speaker 2 Stocks. Speaker 1 Which are falling for the wrong reasons, you know, in good valuation terms. Speaker 2 So. Speaker 1 Not that we're looking for it, but high volatility in interest rates is usually a a driver of excessive movements, downward movements in the world of infrastructure, utilities, long duration assets as you can see over. Speaker 2 The past few years where we've seen significant steepening. Speaker 1 Of yield curves. Speaker 2 We've seen. Speaker 1 You know, long bond yields in the US moving from 1% five years. Speaker 2 Ago to. Speaker 1 To 5%, I mean we are almost 5% in the UK here today. Speaker 2 These are typically. Speaker 1 Considered headwinds. Speaker 2 But as you. Speaker 1 See in our track. Speaker 2 Record EGL. Speaker 1 Has managed to navigate through that context to a large extent thanks to again diversification and also the drastic transformation of a lot of companies which are still. Speaker 2 Perceived. Speaker 1 As bond proxies, but are far from being that type of stocks today. And I suppose you could also see recent conflict as a positive in some ways for the renewable side of EGL. Would you see it that way at all in terms of how unreliable oil and gas supply chains can be? Speaker 2 Yeah, it's, it's obviously early to judge. Speaker 1 Exactly the implications of the conflict in Iran and in the home is straight. Speaker 2 What I would say though is that it has clearly highlighted the. Speaker 1 Instability created by overexposure of a lot of Western countries to fossil fuels. Speaker 2 So if anything we do. Speaker 1 Expect it to be an accelerator of development into carbon free technologies, definitely technologies which are independent from. Speaker 2 Those types of. Speaker 1 Local, regional conflicts with global implications. Speaker 2 And I I mean by that renewables. Speaker 1 Of course, but generally speaking. Speaker 2 Also I would highlight. Speaker 1 The importance of storage for batteries, which is a technology which is still in development, which we expect. Speaker 2 To gradually gain. Speaker 1 Ground and represent a game changer in the next decade for our power generation industry. Speaker 2 And there's another aspect which we also. Speaker 1 Expect to benefit. It's the the. Speaker 2 Grid. Speaker 1 So the transmission of of power also of natural gas. Speaker 2 We believe this is bound to. Speaker 1 Develop very fast as again storage is yet and to become a perfect technology. It's not the case today, but grid is coming definitely in support of better transportation of those power sources within our markets and therefore an important ingredient to reduce our exposure to, again, fossil fuels of the Middle East. On the topic of green energy, that's something that relies on regulatory and government support, which has been a bit of an issue for UK renewable investment trusts recently with, for instance, the change in how renewable obligations are index, effectively leading to a cut in the subsidy. I imagine you might have also had some concern about the transition to a Trump administration in the US as a global trust. What would you say is the best country to invest in, in terms of government support for green energy assets? Speaker 2 Yeah, clearly the UK has been. Speaker 1 Probably the most challenging market for for utilities, one reason being that regulators historically here in this country have been very strong and. Speaker 2 A key part of their. Speaker 1 Mission has been to make sure that utilities would not over earn. Speaker 2 To an extent where they are. Speaker 1 Sometimes being criticized for having been too harsh. You know, that's particularly the situation in the water industry in the UK where you've seen that the government has decided to actually dismantle and restructure of what the UK Water regulator. Speaker 2 In order. Speaker 1 Maybe to transform it into a an instrument which would both make sure companies do not over earn but also would be here to incentivize investment which is maybe an area which has come under criticism over the past few years which the government wants to correct. Speaker 2 So I would say in general, the UK has been a difficult market. Speaker 1 You you indicated that there's been a change to the indexation of the the the rock certificates. Speaker 2 Which has. Speaker 1 Been a a proper headwind for some of the trusts definitely in this country. Speaker 2 Having said that, I wouldn't say the. Speaker 1 UK is representative for the global renewable industry and you, you indicated obviously that the US administration has not been favourable to this sector, obviously very loudly slow so. Speaker 2 Having said that, what we are seeing is interesting because the the more. Speaker 1 Renewable. Speaker 2 Projects are being. Speaker 1 Blocked in the US the the higher electricity prices are going because it obviously enhances the scarcity of power generation power capacity, you know around and available. Speaker 2 So you know the world industrialized countries. Speaker 1 Has phased out of coal has. Speaker 2 Pretty much stopped investing in. Speaker 1 Nuclear, apart from some exceptions like the UK or OR. Speaker 2 Or France and most of those. Speaker 1 Base load technologies what we. Speaker 2 Call base load. Speaker 1 Technologies are technologies which are able to produce 24/7, you know, electricity 24/7. Speaker 2 Those type of base load. Speaker 1 Technologies have been. Speaker 2 Replaced by intermittent. Speaker 1 Power resources like wind and solar. Speaker 2 So this has. Speaker 1 Even created a an an additional problem of scarcity of power resources at a time when consumption is bouncing as we we discussed earlier. Speaker 2 So the. Speaker 1 Conditions of operations for renewable. Speaker 2 Players are. Speaker 1 Definitely not as bad as perceived or feared over the past few. Speaker 2 Years. The last. Speaker 1 Players which we have exposure to have. Speaker 2 Ability to offset. Speaker 1 The effects of inflation of their costs into the final price paid by the the the the customer prices at which they're signing contracts have gone up. Speaker 2 And and contracts. Speaker 1 Have lengthened in duration so now again contract like the one signed in Pennsylvania in 24 was a 17 year contract with a close to renew it for a a similar period. Speaker 2 So we're talking. Speaker 1 About contracts of 2025, thirty years plus, which are being signed by renewable developers today on unprecedented levels of prices, so very attractive conditions for a lot of those operators. Speaker 2 So again, the UK. Speaker 1 Challenging, not representative for the industry as a whole. And you mentioned nuclear, I was interested to hear a bit more about that. So did you say it's predominantly the UK and France where you invested that? Speaker 2 No, actually also nuclear in the US, which is. Speaker 1 Making a dramatic comeback. Speaker 2 You know, 3-4 years ago to be honest. Speaker 1 You were talking to US counterparts or my. Speaker 2 Colleagues, They were highly skeptical. Speaker 1 On the future for nuclear saying that this is a technology of the past, it's hugely. Speaker 2 Expensive. It's risky. Speaker 1 There's no way the US will will go back into that technology. Speaker 2 They're proving they've been. Speaker 1 Proved wrong over the past couple of years. Speaker 2 Because nuclear has the sole technology able to provide 20. Speaker 1 47 electricity with no carbon emission today. Speaker 2 So as long as we don't have proper. Speaker 1 Battery storage technology. Speaker 2 Nuclear will will be a. Speaker 1 Key asset. Speaker 2 So in the US, we've seen. Speaker 1 Some of the key nuclear players, you know, companies like Constellation, Vistra and and and Texas signing very attractive contracts with their spare capacity with tech, AI data centre companies. Speaker 2 So nuclear is making a big comeback. We think this is bound. Speaker 1 To come. Speaker 2 Also to Europe and the UK. Speaker 1 Now at some point it it it. Speaker 2 Would be an. Speaker 1 Exhausted spare capacity. See what I mean? But for the moment, nuclear is proving a a very critical asset for those who own and operate it. Can we talk about your top holding, I believe still your top holding National Grid, yes as well. I saw it. It's committed something recently like 70 billion to modernising and expanding its energy networks. Speaker 2 Yeah, National. Speaker 1 Grid is a. Speaker 2 It's an interesting illustration of. Speaker 1 What we we've just discussed. Speaker 2 You absolutely write the company. Speaker 1 Announced about a £70 billion program. Speaker 2 Over 5 years. Speaker 1 So pretty short period of. Speaker 2 Time entirely financed. Speaker 1 Notably through a 2020. Speaker 2 Four, capital insurance. Speaker 1 Of £7 billion massive capital insurance. Speaker 2 It's interesting because just after that. Speaker 1 Assurance National Grid's share price has started to perform very strongly and it's dramatically re rated since since then. Speaker 2 So what does it mean? It really tells us that in world of utilities, the more CapEx, the better CapEx is. Speaker 1 Usually enhancing to returns for utilities. It's largely regulated as we know. Speaker 2 One of the. Speaker 1 Critical hurdles is usually the financing of the CapEx. Speaker 2 So for those companies like National. Speaker 1 Grid which are able to issue such large amounts of of money in one go through a share assurance. Speaker 2 The problem kind of. Speaker 1 Behind them. Speaker 2 And at least to re. Speaker 1 Rating. Speaker 2 Now has National Grid performed? Speaker 1 To an extent where it is fairly valued, we don't think so. We think it's still one of the most attractive ways to play grid development and expansion. Speaker 2 And National Grid has rated. Having said that, it's still trade at a significant discount to. Speaker 1 Their US peers and as we know, National Grid today invests actually even more in the US than in the UK. Speaker 2 So. Speaker 1 Quite often I consider on National Grid, I like to say that although it's a little bit provocative as one of the cheapest US utilities, although it's obviously a very strong utility and name and group in the UK, but relative to US valuation of peers, National Grid still looks extremely attractive with. Speaker 2 Growth outlook. Speaker 1 Similar to some of the the the best utilities you can find in the US And talking about discounts, would you agree that there's a bit of a mismatch in how private and public markets are valuing infrastructure at the moment? I know you're only invested in listed companies. Yes. What? Speaker 2 We've noticed. Is that the the large? Speaker 1 Private equity infrastructure specialists have raised records of amounts of cash over the past couple of years. Speaker 2 And this money? Speaker 1 Needs to be. Speaker 2 Invested and when we compare the. Speaker 1 Valuation terms used by private equity specialists with the listed valuations we see. Speaker 2 A valuation gap which? Speaker 1 We've never seen before to that extent. Speaker 2 There's always been. Speaker 1 A premium for private equity transactions, at least to account for the the the control of the company. Speaker 2 'S added leveraging capability. But I would say typically that premium was. Speaker 1 In the order of 2025%. Speaker 2 Now you know. Speaker 1 Last year there was an interesting transaction in Canada. Innerjax, a Canadian renewable developer, was taken private by Keste Depot du Quebec. Speaker 2 They paid. Speaker 1 An 80%, eight, zero, 80% premium to the average share price of Innerjax to take it private. So why is that? I don't think private equity operators out of their mind, I believe. Speaker 2 They tend to have a better. Speaker 1 Sense of the characteristics and the beauty of the long duration business models. Speaker 2 And they tend to be much less. Speaker 1 Influenced by the short term fluctuations in interest rates than listed investors. Speaker 2 So we have. Speaker 1 Noticed the same. Speaker 2 In pretty much every single sub segment of our. Speaker 1 Investment Universe. Speaker 2 Maybe we can mention the example. Speaker 1 Of airports, there are not many listed airports in OECD markets, about 10. So it's a, it's a tiny market, but. Speaker 2 There are a lot of private. Speaker 1 Transactions in the airports and the private transactions. Speaker 2 Over the past few years have averaged. Speaker 1 Around 20 times EV EBITDA. Speaker 2 When I see the average of. Speaker 1 Listed airports below 10 times EV EBITDA. Speaker 2 So multiple from 1:00 to 2:00 between the the. Speaker 1 The What private equity investors are paying within the asset class. Speaker 2 And what listed. Speaker 1 Investors are are are are valuing for very much the same type of assets. Speaker 2 So that valuation gap. Speaker 1 Which we see. Speaker 2 Across our universe is. Speaker 1 From our perspective, a significant anomaly which points to the we believe under valuation sharp under valuation of listed infrastructure assets. And lastly, at a time when I'm writing about pureplay infrastructure and renewable stress trading on really heavy discounts and you've returned to a premium recently, it seems like diversification is something that's paid off for you. Is is that something that remains a priority? Speaker 2 Yes, I think diversification is key. It's something which as a specialist of listed. Speaker 1 Infrastructure we can. Speaker 2 Provide geographical diversification. Speaker 1 Diversification of sub. Speaker 2 Segments between. Speaker 1 Power and gas. Speaker 2 Utilities. Environmental services with water and waste. Speaker 1 Transportation infrastructure with airports, toll roads, tunnels, diversification is. Speaker 2 Key because quite often regulatory frameworks are very. Speaker 1 Local. Speaker 2 So you want to. Speaker 1 Invest in regulated businesses and non regulated and you. Speaker 2 Want to diversify and? Speaker 1 Spread your risk of regulatory exposure. Speaker 2 So. Speaker 1 You may get hit and and let's say in Connecticut, but it has no implication on your holdings in Texas. And the regulatory framework in Portugal is very different from the one you have in Spain. Speaker 2 So. Speaker 1 It's very local. You need diversification in our space. Speaker 2 So yes. Speaker 1 This will. Speaker 2 Remain a factor, maybe one one thing also which I'd like to highlight. Speaker 1 Beyond diversification is. Speaker 2 The our. Speaker 1 Focus on trying. Speaker 2 To identify companies. Speaker 1 Which are transforming their own diversification. Transforming. Speaker 2 Their businesses from sometimes very much. Speaker 1 Merchant types of businesses largely volatile depending on external factors like commodity prices. Speaker 2 Moving into companies and business mixes, which are. Speaker 1 Much more predictable. Speaker 2 Through a combination. Speaker 1 Of regulated and fully contracted types of businesses. Speaker 2 So from our perspective that diversification of their mix. Speaker 1 Represents A dramatic de risking of the profile of a lot of companies we try to identify and. Speaker 2 This is bound. Speaker 1 We believe to lead to re ratings which. Speaker 2 Again when we. Speaker 1 Watch, the absolute and relative valuation terms of listed infrastructure are far from being discounted, right. Well, on that positive note, I think we'll end there. Thanks very much for joining us. Speaker 2 Thank you. Thank you, Lottie.