Capital, Conviction & Transformation Investing for the Next Generation

Welcome everyone. Thank you for joining us gentlemen. Um I'm excited for this conversation. As you you know all have noticed being around Abu Dhabi the last couple days just the huge amount of development construction cranes everywhere and a lot of it is down to the the capital and operational expertise of of some of our guests. So um Khaled, let's start with you.

You're our host. Mubat obviously invests all around the world, but Abu Dhabi is increasingly a destination for global capital. And maybe just discreetly, what is the pitch and and how does the UAE differentiate itself from other countries in the region that have frankly fairly similar ambitions?

Good morning everyone. Thank you for having me. Uh I did not expect to start with this question. wasn't even in the list but I think it's very easy to answer. Um I think to understand the attractiveness um of Abu Dhabi and the UAE in terms of becoming a destination of capital you need to understand its history.

Um and I always like to talk about this story which is when the UAE started in 1971 uh the late she z the founder of the UAE um basically the UAE was you know was small coastal town made up of small coastal towns uh trading on pearl trading on smallcale agriculture and there was no infrastructure whatsoever no public institutions, no hospitals, no schools, no infrastructure. And the focus of Sheikh Zed was mainly to build the right infrastructure for the country including public institutions, hospitals, roads, ports and his strategy of execution was very handson. He was super hands-on. um he used to oversee every single major project um uh personally and then towards the end of 2000 when she khalif became the president his son and then she Muhammad the current president the foundation is already laid infrastructure is already laid everything is ready for them to start thinking about what is next how to build an innovationbased sustainable able economy and and when you hear bets today here in Abu Dhabi like the AI bets and the the the climate the decarbonization initiatives the renewables etc. It's all driven from the fact that everything was laid and the current leaders had all the time um to basically think about you know what to do next and how to take the economy to the next level.

And throughout history, consistency in execution, clarity in policy, visibility into the next 10 years, 20 years was quite common and dominant. and for capital today, you know, that visibility and that policy clarity is is very c crucial and and it's becoming an edge for Abu Dhabi and for the UAE today. And that's why you have a lot of capital flying to to the UAE. A lot of asset managers setting up shops presence in the UAE. And I remember in the past few months a lot of companies came and set up their offsites here and their board meetings etc.

I think that's uh that's the main driver. It's it's understanding the history and the consistent execution.

And then as you think about because you know many in the audience and some on stage you know want to partner with um the huge uh investment funds here. How do you think about partnerships co-invest sort of where that conversation has gone over the last couple of years? I think if if you look at the partnerships over the past 20 30 years, it has evolved in a big way. I remember 20 years ago when asset managers used to come to Abu Dhabi and sad I'm sure you remember that um when you meet with asset managers as a principal investor the first two to three minutes they will greet you and then the rest of the hour they're going to go to the pitch and start presenting the fund and they're going to end up the meeting with this is how much we expect from you now 20 years later they will spend maybe 99% of the meeting just talking about how we can work together how we can collaborate how we can add value um I think that definition of partnership has evolved uh from becoming a passive GPLB relationships into more of the co-architects um um of of deals together where we work with GPS and asset managers early on engage uh in co-investments, co-anderite. That was one of the um evolution.

But the second was it's no longer about seeking returns. It's more about missiondriven. So they join forces to tackle um um a big problem. U they join forces to set up energy platforms, to set up data center platforms. So it's more about the mission rather than one single oneoff transaction.

Raj, you're nodding. Is that ring true? AB:

Absolutely. And I I actually think that the region there I would say there's probably been three stages over the last 20 years.

Raj, keep bringing the microphone up.

I I would I totally agree and I think there's been likely three stages in the last 20 years. For sure. 20 years ago it was about coming to the region for capital. I think especially in the last 5 to 10 years, it's been a lot more about seeking investments in the region. We have a very stable US dollar base, rate governance, high growth, $2 trillion of GDP.

And I dare to say in the last couple years, it's been about partnership. It's piggybacking on the vision, the clarity that that the region has looking forward 10 years, 20 years and partnering that with origination, the depth of capital, the patience of investing together, enabling us to do things that we could not do standalone. And I think that's really what the next phase is that's just getting started right now.

Max, CPPIB is a large Canadian pension fund similar to some of the sovereign funds in the region. you know, invest effectively [laughter] forever, very long-term capital. Um, and curious as you're looking around the world, I think you're based in Europe, and maybe you can give us a little bit of a view kind of on where you see the opportunities and the time horizons for some of these really big ambitious projects.

So, uh, first of all, thank you for having me. Um, I mean, the the way we look at the world as a place to invest is through two lenses. One is the lens of time which is we invest for the long term and whilst there is geopolitical instability there is political instability uh there's uncertainty these things change over time and we don't flip-flop in and out of short-term trends or short-term situational investment circumstances. We take the long and that is why we very often partner regularly partner with the best in the world and we look for those partners that aligned with taking the long view looking through that short-term volatility. The second lens is lens of relative value.

We get paid for risk as investors and in the world today there is no risk-free place. It depends on how much risk there is, how long-term structural that risk is, and then what we're getting paid for it. Now, there's very few places in the world where we will not play, at least not at the moment, because the risk is simply considered too large. At most other places, it's a question of do you actually get paid for the risk that you're taking and then very importantly do you partner with the best often local partners that help you navigate that risk both in assessing and then managing through that risk.

Sodic, you've been investing in the region a long time and you know when the big challenge is of course this huge pivot from an oil driven economy to a much more diversified export driven tech driven economy. You've invested sort of [snorts] throughout the cycle. What do you where do you where do you think we are? What inning is the region in in that transition and what's needed to kind of to close the gap to where they want to be? [clears throat]

First of all, thank you for having me. Uh but I just want to pick up on a point that Khaled made which I think is extremely important uh which goes to the heart of the long-term strategy that a country like the UAE adopted uh which is the development of its basic infrastructure and then effectively taking it to the next level. And maybe to add a little bit to uh the your stories and your the experience of UAE um in the early '7s uh after uh the UEE was created as a country Zahi said that he wanted to build uh a large network of water diesel plants. And at the time uh the physibility showed that you really needed one such facility and he said that doesn't make any sense. I want three and so people were a little bit uh taken back because they said you know I don't think you really need three facilities at least it'll take you another 20 years to use them.

Of course the fact is they were fully operational and fully at full capacity within 3 to five years. So I think there's several elements. You need that infrastructure which is there. You need the vision and that's extremely important and I think um that you're seeing it more and more in the region. I think Saudi is a good casing point where that has changed quite dramatically in the last decade or so.

And I think the third part that people in my view are not focusing on is not the capital. So as you said big source of capital people came please invest in my fund now it's more of a partnership but that all is around capital. I think what people are missing in the region is that if you look at the human development statistics in the 1990s, early 1990s, literacy rate in the region on average was about 70 plus%. Today it's 99%. That is a major change.

So I think what's the most attractive in the region? Yeah, capital. But honestly, capital is available globally now in huge amounts. If you look at the United States, there's an abundance of capital. You can argue.

I think what's what's extraordinary in the region is the development of its human capital of the people. Their knowledge, their training is in my view on par if not better than anywhere in the in the world. So what I'm more excited about is the people in the region themselves that really have achieved an extraordinary level of capabilities and capacity and I think that's the most exciting thing. It's a young population. It's a highly educated population.

It's a highly motivated population with the vision that the leadership has to be able to push that.

Um I think that brings us actually to AI. I think the UAA was just seeing some data the other day from Microsoft. It's the highest usage in the adult working uh age population of AI. Um Raj maybe just starting for a second would is AI just going to be infrastructure when we talk about infrastructure are there other places that are interesting or is this really where all of the blood is going in in the real assets world?

Oh like there's a there's a lot that's interesting in infrastructure but there's no doubt a massive opportunity in AI. Um, I think if you look forward 20 or 30 years, you can get a lot of conviction that AI is going to have meaningful impacts on us, our economy, our society, our people. And that's going to require a tremendous infrastructure buildout. So, we actually don't get caught up a lot in, you know, is there a bubble, is there not a bubble? Um, I think if I had to invest in that way, then something's gone horribly wrong.

like I won't be able to sleep well at night if I had to pick. Is there a bubble or not a bubble? That's I've done something terribly wrong. But just like everything else has cycles, has good times to invest, bad times to invest, good valuations, poor valuations, there are places right now that make a lot of sense to invest in AI and in data centers and in connectivity and capacity. And there are places right now that don't make sense.

Can you give us one or two of each? Well, I think the I think what you need to be cautious of is paying uh big multiples that require growth in a certain period to get your capital back, right? If you're paying for the hope for growth versus paying for data centers under contract where you get your capital back and that's something very very different, right? That's one. Number two, I I'll draw two extremes.

On the one hand, you can invest in a single facility with a single tenant focused on training in a third tier market. Single large facility susceptible to disruption and events. much different risk profile than a tier one market used for inference in addition to training where the territory and the power access has value beyond one customer radically different risk profiles and so I think it's a fool's errand to to to get into the debate momentum money will get into the debate is it a good time is it a bad time is there a bubble not a bubble patient money with vision and long term will not get in the debate they'll recognize like in everything else there's good time. There's good things to invest in and bad things to invest in all along the route. And that's I bet the patient capital you have on stage today focuses.

Yeah. Can we hear from from both Max and Ahalid, you know, particularly when you look longterm, one thing that we just don't know is how long live these assets will be and and how quickly the tech will will degrade. So curious sort of from a technical matter as you're underwriting, how do you think about this generation of chips versus the next one and and this server configuration versus what might come after and how you're sort of underwriting returns to that?

Yeah, thank you. I mean not surprisingly we're heavily heavily aligned with uh Raj what you just said. I think if you if you look at potential bubbles in AI, you first need to look at where will value occur in the broader AI value chain in the long term. And I think there's some question marks around models going to be truly truly differentiated. There's certainly great value that can be generated on the application layer, but we're lucky I'm lucky.

I'm an infrastructure investor and so certainly I personally and we as a firm believe that there's going to be lasting value created in the right areas of the infrastructure layer powering AI. Now when you then as Raj pointed out look for these pockets of defensible long-term value you need to look at differentiation and differentiation often comes from not only a stable political regulatory environment good underlying demand fundamentals but also the scarcity of the assets that you're investing into. And so when you look at some of the key bottlenecks in the AI infrastructure layer such as the right locations where latency is a key consideration um obviously the right customers and then power I mean power is often the key bottleneck to unlocking the AI opportunity. When you get those together there's just a finite supply of those key infrastructure assets that can be built. So when you look at these enormous numbers in terms of capex going into AI seemingly much of that is just noise.

When you look at the actual execution of the high quality truly powered key strategic sites and key locations with high quality counterparties there's only so much of that and we actually feel that is a great place together with our partners to deploy some serious help.

Nalled same question to you. I mean you have a lot of capital and and a mandate to invest globally but also Abu Dhabi has huge advantages in in energy sources and operating these you know these big infrastructure assets. How do you think about sort of where Mubala wants to be putting its AI chips?

I think when it comes to to AI I look at AI from a real assets angle. So nobody doubt today that AI is going to you know change every part of our life. Uh we all know that AI needs compute, compute needs power, power needs you know data center uh power needs energy etc. But I think when things are moving at a very high pace almost very blistering in in AI and there's a lot of hype as a real assets investor it's important to stay disciplined to stay original to your roots as a real assets investor which is about um um finding the essentiality and the services and the infrastructure that you need to provide to the AI um revolution. So, and what makes me a little bit worried is when I see this hype, how you apply that trigger and stay disciplined.

Um and so when we look at for example data center opportunities, we want to make sure that we continue to implement our investment principles of not going into data center opportunities where they're going on an aggressive growth from a contracted velocity basis. We like to go into data center opportunities where there is already contracted capacity. We tend to like the cloud part which is the unloved part of of of data centers today. But I want to go into data center opportunities where if they don't win any additional contract I I have six or seven or 5% irr based on the contracted capacity. And so this is how we we kind of stay disciplined when when it comes to investing in a space that's actually moving at a at a very high pace.

But you know this is not new to anyone. I think AI is creating great opportunities in in power and energy and cooling solutions and battery storage and uh backup uh solutions and hydrogen etc. So there are a lot of great tailwinds behind these sectors but I think what matters is staying disciplined. Speed is an advantage but u discipline is the mo

sadic do you see that discipline I I you know one thing as an observer of the AI phenomenon it's everyone wants to be in it and and to the point that Raj and Khaled were making there's a lot of growth expectations baked in which you know contrasts with basic infrastructure investment which is all about offtake agreements and very conservative underwriting. Do you feel like you're losing deals to people who are less disciplined perhaps or a little more um optimistic about the growth piece of this?

Yeah, [clears throat] you and I have discussed this many times. Losing deals is the least of my concern. I think for me the most important thing is uh to Khalid's point is really avoiding. So my number one objective besides doing good returns is also as part of that avoid uh bad investments. If in that process that means I may end up foregoing investments that ends up being actually good ones I'm okay with that.

Uh and so I I'm sure that's not what Raj meant in terms of we don't care about bubbles. Um but we should look for the long run that that is understood and I would agree with that. But I think the maybe what K is saying is when there is the elements of a bubble um I think you ought to take a step back and look at your entry price because I don't care what you tell me if you come in at a very high price it really takes a long time to get out of it. If you had invested in the NASDAQ in 2000, a day before the crash, it would have taken you over 20 years, two decades to get back to that number. So, so the point I'm trying to make is I am not sure that there is a full in fact I believe that there is no full understanding of what are the fundamental requirements that we need when it comes to building the infrastructure associated with the AI needs for the reasons you talked about technology is changing every minute uh power supply may or may not change may be available may not be available uh and frankly no one is talking about it the use of AI.

So I I don't see a clear model. Uh um um uh uh chat open AI has to require another $120 billion of investments in the coming four years to be able to get to their basic numbers. That's a lot of money. So I'm I I'm just hesitant. And I think what said is exactly right.

Look at the basics. look at the fundamental returns and if that means that you may have to forego something which has higher return but also very higher risk fine that's okay with us as long as you have the overall possibilities and you have the ability to allocate capital across different sectors in different regions in the time we have left I thought we could do a quick lightning round which is that if each of you had a billion dollars and a 10-year time horizon to pick kind of one sub sector in infrastructure what would it be here and go down the Oh, me.

Yeah, we'll end with the host.

Um, in the region or globally?

Globally.

Well, you know what? Let me start with the region. I would invest in anything that has to do with increasing and improving human capital.

Compute for human capital.

Improvement of human capital, education, uh, education facilities. I think it's an extremely interesting area. You have a a a young population that is thirsty for that. As I was saying, you were able to increase literacy rate to 99%. What you need in the coming decade is an improvement in the quality of education to be able to deal with the global requirements.

I think that's an extremely important area. Okay, that will be my sector. Max.

So I would um first of all hard question to answer without knowing how these assets are priced but I would I would invest in the most attractively priced relative value risk across the energy transition spectrum.

Okay Raj. Yeah, I don't uh I would love to be direct, but I I truly don't believe that there's any single geography or sector that presents the best opportunity. Um you know, and similar like my my bubble comments a comment that you could spend all day trying to figure out bubble or not bubble. completely agree. Valuations matter, but you can't paint a brush, you can't paint the sector with a brush that says it's a good time to invest or a bad time to invest.

There's always opportunity and there's always danger, right? And so, uh, I would invest in a high performing diversified fund.

Okay. I guess KKR offers one or two of those. [laughter] Yes. Had to call it. Um, first I will build a digital twin for me and then I'll give the rest to everybody here to invest on my behalf.

I'll take some time off. Uh, no actually what I'm going to do is I'll I'll try to find an opportunity that has the real characteristics of infrastructure inflation linked. It's backed by contracts oftake. It's a super essential service that's going to be there for the next 30 40 years. an asset that can withstand changes in governments, changes in alliances, changes in different, you know, geopolitical circumstances.

Something that most likely will be very boring, but will make you at least 12% irr.

It's always the boring ones. It's the It's the fun consumer plays that get everyone into trouble. Well, this has been a fascinating conversation. Thank you all so much for your time. Um, and I hope you all learned as much as I did.

Thank you. Thank you.

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