Alpha Edge Recognition - Alpha Generation: Infrastructure Investing
This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.
Petya Nikolova is nominated for Alpha Generation for Infrastructure Investing. She joined New York City Retirement Systems (NYCRS) in 2012 as Head of Infrastructure, before adding the title of Deputy Chief Investment Officer last November. At the $260 billion public pension fund, she has successfully led the build out of the infrastructure asset class, growing it from zero to currently over $10 billion.
Additionally, she established NYCRS’s first internally managed co-investment program. Her expanded responsibilities now encompass direct oversight of real estate, as well as contributing to the formulation of investment strategies and portfolio construction across all asset classes.
She is a graduate of the University of National and World Economy in Bulgaria and the Maxwell School, Syracuse University in the U.S. After obtaining her master's degree in public finance, she joined the insurance company MBIA as Vice President focused on global energy and transportation. She subsequently held several project finance positions with European banks before joining the New York City Retirement Systems as the Head of Infrastructure Investments and assuming her current role. The following is edited for length and clarity.
Can you share on overview of what our portfolio looks like today?
We are a global investor with a well-diversified portfolio across geographies and sectors. We are primarily invested in OECD countries, with the U.S. being the largest exposure, followed by Europe and the rest of the world. In terms of sectors, we are primarily invested in digital infrastructure, renewables and energy transition and transportation.
What have been the most significant changes over the last few years?
Over the past few years, we have witnessed the rapid acceleration of two mega trends: digitalization and energy transition. These trends have had a significant impact on the composition of the infrastructure portfolio. Our exposure to digital infrastructure more than doubled, while our midstream exposure decreased materially due to the dynamics of energy transition and the risk of stranded assets.
What factors influence you most when evaluating opportunities in your investment space?
We primarily invest through managers, and manager selection is a key focus. We look for managers who have the right experience and a strong track record in the sectors in which they are investing.
Importantly, we also focus on understanding how our partners are built for the future. According to a recent PwC survey, one in six asset managers could disappear by 2027, either through going out of business or being acquired by larger groups. This highlights the significance of the questions we have always asked regarding alignment, value creation, and succession.
On the co-investment side, we select opportunities that help us refine portfolio construction on a no fee, no carry basis.
When looking to form a strategic partnership with an asset manager, what are the key areas on which you focus?
Adding to the key areas discussed above, we focus on transparency and collaboration when choosing our partners.
What investment opportunities are you focusing on, over the next 12 to 18 months?
We’re a long-term investor, and as such, we must think beyond the immediate future of the next year or two. Our focus is on identifying where we need to invest today, in order to achieve success in the next 10 years and beyond when we eventually exit these investments.
Let’s continue our discussion on energy transition. This presents an unparallel opportunity, with estimates from various sources exceeding $100 trillion over the next few decades. Within this vast opportunity set, there are both well-known and emerging areas that we can consider for investment such as renewables, hydrogen, carbon capture, sustainable fuels. Therefore, the question arises, how do we find the “picks and shovels” that many players will need to use in this green rush? And how do we invest in those “picks and shovels”?
What are your protocols to ESG in how you execute with your managers?
We have had a long-standing policy that incorporates various elements of ESG considerations such as responsible contracting, environmental liability, and coal opt-outs. Moreover, alongside our investment due diligence, we have been conducting ESG due diligence on managers.
However, it is worth noting that last year we increased ESG efforts. This involved expanding our ESG team, intensifying our work on net zero, and further enhancing our ESG framework.
What challenges do you anticipate for your team over the next few years?
The greatest challenge I observe lies in evaluating whether we are adequately compensated for the risk we take. While this judgment has always been inherent in our role as Limited Partners, it is becoming increasingly complex to make this determination.
In relation to the energy transition theme, for example, we come across strategies that encompass underlying investments displaying converging risk and return profiles between private equity and infrastructure. Consequently, determining the appropriate risk-adjusted return for these strategies becomes more intricate.
What would you say is your office’s greatest accomplishment since you joined?
In my view, the greatest accomplishment has been the institutionalization of our investment process and transforming our investment committee into a debate society. Having said that, we are embarking on a comprehensive review of our investment process, decision-making and implementation to ensure we continually enhance the investment outcomes for our stakeholders.
When you are not investing on behalf of your fund, or attending events hosted by Institutional Investor, what do you like to spend time your time doing?
I have a passion for playing tennis, but over the last year I have discovered a new favorite activity: doing French homework with my 10-year-old son. It has been a wonderful way for us to bond, allowing me to refresh my French, while giving an opportunity for my son to make fun of my pronunciation.
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