Investing Billions - E420: Why Infrastructure Is a $40 Trillion Opportunity

Episode Date: August 24, 2026

What if the biggest AI investment opportunity isn’t AI companies, but the infrastructure required to make AI possible? David sits down with Stuart Waugh, Managing Partner of Northleaf Capital Partners, to explore why the AI boom is creating massive demand for power, data centers, communications networks, and other essential infrastructure. Stuart explains why Northleaf estimates roughly $40 trillion of infrastructure investment will be needed across its addressable markets over the next decade, and why governments increasingly need private capital to help fund it.

At Northleaf, you manage $31 billion, and you believe today the biggest opportunity isn't in AI. Why is that? That's because we're focused on the enablers of AI, principally infrastructure. And if you think about it, without infrastructure, AI doesn't happen. Everyone uses this term infrastructure. What does it mean exactly? For us, it really means assets and projects that provide essential services without which you just don't get a productive modern society. So it really is the foundational building blocks of societal progress and ultimately societal prosperity.

And what's the investment case for infrastructure that's supporting the AI boom? The example I always think about, if you go back to the gold rush in history, is the picks and the shovels and the mules. So if you think about what is AI really need, AI needs power. So that means both generation as well as transmission of power. It actually needs the data centers, obviously, and there's been lots of attention paid to. the physical construction of data centers. Then it also needs the digitization and the communication. So it needs transmission, it needs cell towers, it needs access that you and I now take for granted in terms of where we can get information and communication. So you think about all of those building

blocks that are necessary for AI, that's where infrastructure comes in, and that's where the massive demand for capital we see both now and well into the future. And how would you bucket those different investment opportunities? We think about infrastructure as having a series of characteristics. So essential services are critical. Like what is it that really is foundational to the asset? Why does it exist? How much would people notice if it cease to be? That's really the sort of essential nature of it. And then the hallmarks of an infrastructure asset, you're looking for predictable cash flows. You're looking for long-term, long-lifed assets, looking for relatively low correlation to the broader economic condition. In other words, assets that you're going to

use regardless of whether the stock market's gone up and down or regardless of what's going on in the broader geopolitical environment. And ultimately, you're looking for assets that can deliver predictable, stable cash flows, ideally with a degree of inflation linkage. And so there's a variety of things when we can chat about it, a variety of ways that the definition of infrastructure has expanded over the years, but at its core, it has those characteristics. And that's what capital allocators are looking for as they increasingly use infrastructure as part of their portfolios. As an infrastructure investor, how do you assess how much infrastructure is needed for something that seems to change on a weekly basis? Ideally, you're looking beyond the short-term ups and downs.

You're looking for long-term trends, long-term themes that are going to define investing over five. 10, 15 years. And so when we think about one of the reasons why we're seeing such a demand for infrastructure capital today is that you have the convergence of both demand and supply. So on the demand side, if you think about any major theme that you want to talk about, whether it's urbanization, de-globalization, energy security, energy transition, all of those broad investment themes at the end of the day come back to a demand for infrastructure investment in one form or another. On the supply side, you've got a situation where historically, especially here in the US, a lot of infrastructure funding was done at the municipal level through muni bonds

and other forms of sort of government borrowing and government debt. There's not a government at any level in the Western world that has sufficient financial capacity at this stage to fund the infrastructure investment that's going to be required, enter private capital. And so there's a huge opportunity for private capital over the next 10, 15, 20 years to step in and fill some of that funding gap. And so to your question, we're really focused on those longer term themes. It's not that sort of what's happening this week or next week. We're trying to take it five, 10, 15 year view. however you slice it, there's a significant demand for private capital, including we haven't talked about it, the refurbishment of existing infrastructures. The infrastructure, the assets that we take

for granted today are all in many cases, you know, getting well on in years. And so the need to refurbish to reinvigorate even some of our existing asset base, that just contributes to the opportunity set. This kind of reminds me of private credit. Private credit. Private has grown to, I think, over $10 trillion asset over the last decade. A lot of people forget why it's grown so much. And the reason is because the banks were no longer able to make these loans, and that created this vacuum, and private credit came in to fill this vacuum. It seems like a lot of that is happening in infrastructure.

Traditionally, governments have backed these large industrial projects. Today, they're unwilling to do that. Completely agree. And I don't know if it's unwilling as unable, right? And I think that's part of the trick here is governments actually have a huge interest in promoting long-term private capital into infrastructure. They know it's needed. They know society depends on it. And they, I think, have come to the realization that they're not going to be able to fund it directly to your point.

So how do they go about then encouraging and incenting long-term private capital to come in and fill that void? It's no secret that a lot of people are upset about AI. about data centers. How do you underwrite the political risk when it comes to your infrastructure investment? It's a good question. What you really have to do is try to make sure that you are being a responsible long-term participant in the societal trend that is supporting the asset loss. So if you think about energy production as one example that will drive a part of the demand that we're seeing from AI and data centers, it's thinking about if you're going to to be producing energy through a power plant, through a wind farm, a solar farm in a particular

community, how are you ensuring that you're participating in that community as a responsible long-term investor and essentially earning the social license to be a long-term player and trying to stay away from some of that short-term gyration in terms of people's perception of the long-term trends and really trying to build assets and capabilities that have such a demonstrable benefit to society for the long term that you get and earn that social license. That's a critical piece. Any private markets investor will tell you if you're going to invest for the long term, you're going to need to make sure that you've got a sort of strong governance contract,

but also a strong social construct. Infrastructure is no different. Maybe you could double click on the energy sources that are fueling the AI boom today and how you expect that to evolve over an extent of 15 years? One of the things that the market may have perhaps underestimated was just how much power consumption is going to be required. And we're starting to see some articles getting written in the financial press about saying investors are now like thinking beyond the data center and actually thinking about, okay, how will we power it? How will we cool it? How will we actually enable the computing activity that is going to drive all of this?

And that's something that we've observed over several years play out across our portfolio. One of the things that I think is particularly interesting is the opportunity set it's creating to almost blend some of the investment activities. So we'll give you an example. We have a number of wind farms in Texas that performed very well, contribute power to the grid. We've recently co-located data center at one site and another's under development. And where we're now actually able to deliver the power directly to the consumer. So we're not subject to issues about grid connectivity.

We're behind the meter, as we describe it. Say that we're able to sell power directly to the data center. They get the benefit of knowing they've got a much more secure source of power rates that we can negotiate over the long term. There's some really interesting examples there of where you've taken one sector or one area of investment data centers. You're combining that now with another area of investment. in renewable power or power generation. And the opportunity set is actually to blend those in a way that's highly accretive to both counterparties.

And so things like that are starting to really transform the landscape. But it all comes back to this almost insatiable demand for power that we're seeing out of the AI boom. You estimate $40 trillion with a T is going to be needed for infrastructure. Where does that number come from? That's really our assessment of what we think, our addressable market is. It starts, some of my former colleagues at McKinsey have done some really good work on what the global appetite is for infrastructure. They'd put that as north of a hundred

trillion, again with a T, over the next 15 years or so. But a fair bit of that, again, is targeted toward emerging markets, targeted toward other areas. So when we think about the way we approach the world, which is predominantly OECD developed markets, mix of energy as we've talked about, communications, infrastructure, transport and logistics, when we winnow it down to the addressable market that fits our appetite, we arrive at what I think is probably still a pretty conservative estimate of around $40 trillion over the next 10 years or so. Whether we're off by a trillion or two isn't the point. The key is there's just a massive demand for capital. And as we talked about, the vast majority of that is going to have to come from private sources. And is this going to come from

pension funds, endowments, sovereign wealth funds, where does this 40 trillion come from? Yes. The short answer. I mean, what we see when we talk to investors around the world now is that infrastructure has really started to take its own place at the table in terms of conversations about long-term capital allocation and the role that this type of asset and this type of cash flow pattern can play in a sophisticated portfolio. And we're seeing that interest range, as you say, everything from large global capital pools down to family offices, endowments, foundations.

I think people are recognizing that especially in a world where geopolitics can be uneven and uncertain, there's challenges in finding a predictable source of return. Infrastructure and the characteristics that displays has a real value proposition for anyone thinking about longer term investing. As I mentioned, you managed $31 billion, so you're constantly talking to institutional investors about their portfolio. How should they think about allocating to infrastructure within their portfolio? It really starts with, again, as we talked about, re-understanding what your definition of infrastructure is. And from where we come at the world, we're really thinking about that as sort of a core to core plus exposure. And by core, we mean long-term cash flows without a lot of growth risk. and a pretty stable base case.

You add a little bit of potential for growth and potential for capital appreciation, you end up into the core plus category. But infrastructure has evolved, I would say, over the last 10, 15 years from being something that people would have considered predominantly a fixed income substitute. So long tail, they're not bonds,

but had sort of those types of characteristics. I think what we're seeing now is people recognizing that with the right structures, and the right approach, you can actually find assets that still have those core, long-term, cash flow, yielding characteristics, but also can bring with them an element of growth and capital appreciation. And so you end up with an interesting hybrid from a private market's perspective between credit, which you mentioned earlier, and private equity. And infrastructure plays a really interesting role in that middle of the risk return spectrum. And that's been highly attractive

for capital allocators of various types. Is there an argument that infrastructure should replace some of real estate investment? We started our infrastructure program 16 years ago. So we're early into sort of the broader adoption by pension plans in particular. Most of our early investors in infrastructure came to it from real estate. So they'd had a good experience as long-term owners of real estate. Many pension plans in different parts of the world start by just owning the building that and continuing from there, but they'd had good experience with sort of real assets or hard assets.

And so a lot of them use that as the jumping off point for infrastructure. I think over the last number of years, real estate's demonstrated that it can have challenges at different points in the cycle. And I think that in and of itself has caused people to take another look at infrastructure as being something that potentially has the same characteristics and perhaps fewer the downsides. In what ways is infrastructure correlated or not correlated to other asset classes? I think that's actually one of the really interesting features of infrastructure is

properly constructed. It should be relatively low correlation to both traditional asset classes and even other parts of your private markets portfolio. The old example of, think of water and water supply, you're going to take a shower generally regardless of whether your public portfolio has gone up or down. And so the ability to deliver those kinds of back to our earlier point, essential services that people require, regardless of what's going on in the broader economy, that has led infrastructure to be a really interesting complement to most other traditional asset classes. And so when investors think about what are they looking for, especially in today's environment, lower correlation, long-term, ideally contracted cash flows,

inflation linkage, obviously a huge element to consider the last number of years. Our infrastructure portfolio is positively indexed to inflation. So a rise in inflation is in some ways perversely beneficial to our infrastructure portfolio. So it's those types of characteristics that investors are really focused on when they think about how do you use infrastructure as part of a modern portfolio allocation. Another part of the lack of correlation is the long-term contracts. One of the things that we think is really important in building out a long-term infrastructure portfolio is to focus on both the type of contract that you can get, the length of it,

the pass-through ability for inflation or other cost escalation, and then the quality of the counterparty. And we've been able to find really interesting portfolios that have both the sort of essential services component, but then are also delivering those services to high-quality counterparties under long-term contracts with good inflation protection. You do that from a portfolio construction perspective, and you're well rewarded for the long-term. Everyone I talked to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it,

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See it for yourself. Start your free trial at Alpha-sense.com slash how I invest. That's Alpha-Sense dot com, how I invest. You're managing partner of Northleaf, you're a de facto CEO, so you have to look at everything at a high level. You look at these geopolitical battles between the U.S. and China in terms of infrastructure and AI. How important is infrastructure part of that? Across our private markets program, one of the common themes is a focus in the mid-market.

So, you know, looking for assets and infrastructure is a great example, that in many ways do one thing well in one location. And so when you think about the challenges that we have been facing more broadly, whether that's shocks to supply chains, challenges to the global trading order, issues geopolitical and security issues in other places, infrastructure is actually very well positioned, especially mid-market infrastructure, of having a degree of what I might call domestic insulation. We tend to not be reliant on global supply chains or not dealing with cross-basket. border customers or cross-border trade, we're generally serving a pretty regional, maybe national, but predominantly local catchment area, and providing long-term essential services to our

customer base. So if you believe that the world is de-globalizing, if you believe that, and I do, that we're going to be in an era where it's going to be harder to predict, harder to have reliance on sort of a stable global order, infrastructure and mid-market infrastructure, in particular is a pretty good place to be. In other words, there's a distinction between infrastructure and goods. Yes, for sure. And regardless of whether you're manufacturing domestically or importing, you still need that sort of basic infrastructure.

If you think about logistics supply chains, great example has been just even we have a number of bulk liquid storage assets. So we store specialty chemicals, we store, jet fuel, we provide sort of the national security reserves for a couple of the European countries. All of those infrastructure assets are critically important, whether you're importing or producing domestically and all of what we've seen going on in the world has just increased people's focus on energy, security, storage. And that again, is just comes back to my point of reinforcing the fundamental importance of infrastructure assets.

Northleith really focuses on the middle market. Why is that? We think at the end of the day, there is so much more to be done in the middle market in terms of the inventory of companies and projects that are, call it, below a billion dollars of enterprise value for easy definition. and we think there's benefit to both the way we acquire things. So being able to buy assets in not uncompetitive processes, but less competitive processes, the ability to have time to patiently build, de-risk, professionalize those assets work closely with well-aligned management teams. And over time, being able to build something that you can then sell on to a ready universe

of large-cap buyers, be they sovereign wealth funds, pension plans, large infrastructure managers. We've seen that play out time and time again. So you get a less competitive acquisition environment. You get the time and the patience build and de-risk and professionalize the asset. And if you do that well, there's a very large and aggressive set of bidders looking to buy those types of assets. That's only been reinforced the last number of years because as you you well know, the concentration of capital into the large end of the market just continues to become ever more pronounced. I think the stats are that in the last year, close to 60% of all of the capital raised in infrastructure went to 10 managers. Those managers can have a great

large cap strategy. There are a number of large marquee assets that they can pursue. But all that's done is it's completely improved the competitive dynamic. for those of us focused on the smaller end of the market. And as I say, it's created a really interesting group of potential buyers for any of the assets where we finished our value creation plan. Infrastructure is only one part of your platform. Talk to me about your private's business. We started our business really in private equity.

That was the first genesis of the firm back in the early 2000s. And there we again invest in middle market companies. and we do that through partnering with third-party fund managers, buying secondary investments, and then direct co-investments. And that, for our investors, has been a great source of long-term, consistent returns, a premium to what they've been able to generate in the public markets. But importantly, and this ties into infrastructure as well, it's given them access to all of the value creation going on outside of the listed markets.

And I think that, if I think of the 25 years that I've been doing this, been probably the dominant theme. There's a lot of chatter about active management, passive management, what's the future of the public markets? While that conversation's been going on, private markets has grown from a very small sort of cottage industry to now representing a significant amount of most sophisticated investors' portfolios. And so that ability to provide good long-term, well-structured access to all of the economic activity outside of the listed markets. That's really animated all of our private's business, started with private equity, continued with infrastructure.

And in 2016, we launched a private credit business that plays on the very same types of businesses, the same themes. And to your point earlier, has really created an interesting opportunity for institutional capital to step in where the banks have retreated. What's the through line in those three businesses? middle market exposure. So we think of ourselves as helping small to mid-sized institutions scale up and invest globally. And importantly, about 40% of our capital comes from helping large capital allocators scale down and invest efficiently in the middle market. Because one of the things

that's been interesting is as the market has grown, as so much capital has congregated in the large end of the market, a lot of those large capital allocators still recognize the value and to some degree the premium value of having exposure to the mid-market. And increasingly, what we're seeing is large capital allocators recognizing that they've backed very strong managers over many years. Success in our business begets size. And so the more successful you are in the most part, you then chase capital, you grow your AUM, you go public, and so on and so forth. And so what we're hearing from a lot of the large allocators is I recognize ignition that while they've had a good experience at the large end of the market, they need to

diversify and they need to proactively look for managers who are specialists in the mid-market, who can almost sort of get them back to some of the dynamics that they enjoyed 10, 15 years ago when the market was smaller. And so that's given us a really interesting opportunity to marry our small to mid-sized investors who look to us for scale with the large clients who look to was to actually help them scale down. And that's been a through line across all three of the asset costs. The latest stat I heard was 85% of companies over $100 million in revenue are private stay in the U.S.

And you can add to that the fact that I believe it's the number of listed companies has gone down significantly over the last decade. And that trend only continues. So people often say to me, well, why are the private markets better? and I can go on at length. I actually think a more interesting question is, how are the private markets different? And what is the type of exposure in today's world

that you can only get through investment in private markets? And I happen to believe, and our track record would suggest, private markets are better, but you don't need to believe that. You just need to believe that they're giving you different exposure to different types of value creation to different sectors, to different investment types.

And that is demonstrably true. And to bring it back to infrastructure, you are not getting pure play infrastructure exposure represented in the list of markets. You have to have a private market strategy if you're looking for the types of investment characteristics that we talked about earlier. I have the CIO of Bitwise make this argument that if Bitcoin is 1% of global market gap. If you're not investing in Bitcoin, you're short 1% of the global construction. Can you make the same argument for the private markets?

Yes. And I think perhaps with even more to back me up on that, just you look at the amount of economic activity that is not represented in the listed markets. And you are not going to be able in today's world to construct a fully diversified long-term portfolio without expressing that private markets exposure in some fashion in your portfolio. If you look at the big capital allocators as a proxy for that, many of them are now 40, 50 percent allocated to. the private market. So it's gone. People talk about the demise of 60, 40. People are saying, well, maybe it's 50, 30, 20. I actually think for most big capital allocators, it's closer to

30, 40. And the 40 being the private markets. That's a trend that is going to continue. And people are consolidating and solidifying their private markets exposure. And for most of the big sophisticated capital allocators, it's closer to 50% than 20%. If you think of endowments as the most forward-leaning and the most progressive investors, you'll see that there, some of them are up to 60% of the private markets. Completely. And that, as you say, they were early movers. They had good experience with it.

They stuck with it. What's changed in the last 10 to 15 years is you're now seeing the large sovereign wealth funds, the public pension plans and others catch up to that level and really sort of lean in through good times and bad into the diversification and the long-term proposition that the private markets represent. Let's talk about private equity specifically. You've been in the private equity market for 25 years. How has that evolved? It's gone from being something, again, that was a very small component of a relatively select

number of institutional portfolios to now being something that is being broadly considered by any institution, by investment consultants and more recently even by wealth advisors and high net worth investors. So it is definitely moved into the mainstream. That has, I think, come as it always with a pressure on long-term returns, especially at the larger end of the market. What we've observed is that market has been incredibly dynamic. It's found other ways to add and create value, and to some degree it's matured over time.

one of the biggest developments has been the rise of the secondaries market within private equity. We made our first secondary investment in 2003. So we've been out at it a long time. We've watched that market develop tool and a portfolio management tool that has moved from being something that was done at the margins, highly opportunistic episodic activity, to now something that is just part of the ongoing sort of liquidity consideration within private equity. So that's been, I think is significant development and one that's here to stay. So the market's matured. There's more capital in that's put pressure on returns, but it continues to generate some really interesting term options for people, again, providing both the diversification away from

the public markets and over time a return premium. Private equity has gone from this niche asset class to this huge asset class today. You mentioned also secondaries has gone from a niche to this huge asset class. What's driving why secondaries are becoming such a large S class? You have to think, in our view, you have to look at secondaries really as being a derivative of the primary market in private equity. And so if you take a 20-year look at the growth in secondaries, they have historically always represented some percentage, generally single-digit percentage of overall private equity activity. And it's still in that range, which would suggest there's still significant room to grow. But the real thing that's happening is secondaries, as I say, has moved from being an opportunistic activity when we first started it, where you had sort of specific idiosyncratic transactions being done largely driven by the character of the seller.

So you had a seller who'd gotten themselves into liquidity issues in another part of their portfolio and you were able to do something on a bilateral basis. And those were terrific transactions where you were buying high quality assets. that had a weak owner. That was a good dynamic. Those types of opportunities continue to exist, but what's transpired as the markets evolved and matured is that you get CIOs routinely looking to the secondary market, not as a way to manage either liquidity stress in their portfolio necessarily or to jettison distressed assets, but just to rebalance.

And so I think there's now a baseline of secondary activity, which is just ordinary course portfolio management, rebalancing, retooling portfolios. And then what you get is from point in time, you get increased activity where people are looking for interim liquidity more broadly. And that's the type of situation we're in now, where the flywheel of regular distributions and regular M&A activity continues to be slow. And so you're getting people looking to the secondary market more aggressively as an opportunity to find interim liquidity so that they can either reinvest in other parts of

their portfolio or reinvest back into private equity. And that's creating a really interesting dynamic for our secondaries business. But it's a different dynamic than where we were 20 years ago. And the nature of secondaries themselves, they've gone from this practice that was looked down upon into an acceptable practice. Very much so, yeah. The stigma, if you will, being either a seller as an LP or the, you know, the, you know, sort of embarrassment factor that some GPs felt if they had an LP who was selling, that is

completely gone. Is that just because it's gone bigger and it's just become more commonplace? Yes, I think it's just become more accepted and more commonplace. What hasn't changed, and this is, I think, quite interesting, is especially in the mid-market, where GPs still routinely think about curating an investor base, not just taking all the capital they can raise. In those mid-market situations, the relationship still does matter. And so in many situations, we benefit because we have a longstanding primary investment program, because we're an active co-investor, we benefit from that relationship angle with a general partner who is often thinking about what their investor base will look like after the secondary transactions happen. They still care about who their LPs are. They still

want to make sure that they understand the relationship, they understand if the LP can add value. And so there's quite a lot of influence that GPs can exert even in a broad secondary process, the type of information they provide, the access you get to the individual deal team. And in many cases, GPs will be quite restrictive in terms of who they will share information with or who they will allow to buy a secondary interest in the fund. So for all of the growth in the market, for all of the fact it's becoming. become much more routine. In the middle and smaller end of the market, it's still much more of a, I wouldn't say fully bilateral, but those bilateral relationships still do matter and prove

to be a competitive advantage. The best way to think about it is as a percentage of the primary. If primary has gone up to a trillion dollars and secondary is still, call it $10 billion, let's say, just 1%, even if primary has grown by 10x and secondary has grown by 10x, it's still relative have they saw that. Yes. And I think there's some interesting analysis that would suggest that secondaries are still undercapitalized relative to the primary market. And so people do overhang analysis to try and determine, well, how many years' worth of investment activity is represented by capital that's been raised. And in the secondary market, it's still well below the long-term average, which would suggest that the growth in the primary capital, to your point,

continues to outstrip the availability of secondary capital. And that's true even as the secondary market has continued to evolve into continuation vehicles and other forms of other transactions where that liquidity can be provided, there's still a lot of room to run for that market. This concept of being a preferred buyer and GPs being able to share information with the buyers that they want as part of their franchise, such an underrated point. Can GPs literally restrict LPs from selling or is it more about being able to influence a transaction? So in most limited partnership agreements, the GPs consent is required to a transfer.

So it's not just soft influence. I think there are very few situations where a GP will let someone go fully through the process of completing a secondary deal and then say no. What they are doing, though, is recognizing they have that hard power. they're using it much earlier in a process to influence who participates in the process for their asset, how they engage, if at all, what type of information they share. And don't forget, even if you've got a situation where a GP is saying, look, I'm not going to share information with any prospective buyers. If you've been an LP in their fund for a decade, you're already sitting on a treasure trove of information, right? You've been tracking individual companies. You've been tracking

individual companies, you've been tracking the portfolio, you understand the valuation policy, you understand not just the track record of the firm, but the track record of the individual deal partner who led the largest company that's represented in the secondary. Like that is a proprietary informational advantage that you as the LP have built up over the years. That's not going to be replicated by a secondary buyer looking at it through an intermediated process and running their numbers for the basis of the quarterly report. As a private equity, secondary buyer, are you trying to get information about the assets

from multiple funds? Are you trying to create this mosaic of information? Yeah, it's all about proprietary information and the angles that you can get on that. So multiple funds, if they exist, are credit business, which lends to the exact same types of sponsor-backed businesses is hugely important. infrastructure sector specialists and operating partners, again, anything you can find that will either give you a leg up in terms of your conviction around pricing and thinking about future value or equally importantly, anything that gives you a red flag or some reason to be cautious and careful and discount your assumptions on either side of the equation, that incremental

information, the off-the-list reference call you can make, the former CEO, of a competing business that might be available to have a conversation. You've got to mine all of that. And to do that, you have to have an established network. You've got to have a team on the ground. And you have to have been doing it for a while. As I get now sort of into 25, 26 years of doing this, you start to realize all of that benefit that's been built up over the years.

Exactly. The compounding. And that's really hard to replicate. When you have $31 billion, does it become easy to cold email? other GPs as well? I don't know that it's ever easy to do that. I mean, part of what I think we've built our brand and our reputation on is being a good long-term partner.

So the best calling card for us is another GP speaking to one of their peers and speaking to one of their competitors. Exactly. And so we also get the benefit now of having been at this for long enough that we get a lot of inbound. I mean, we'll do 400 meetings a year with prospective GPs, our, private equity team will tell you it's typically three to five years from the first interaction to actually making a primary commitment. So these are long courtships. But there's still no better way

to get to know a prospective partner than having one of their highly respected competitors. Talk to them about the fact that they've had Northleaf as a long-term investor. They've lent to two of our businesses. They've co-invested in three of our businesses. They've been in five of our last six funds, those are experience base and a relationship base that's really valuable. One of the things I guess I'm trying to figure out is why there's not more capital going into secondaries. I mean, the industry is working on it. It's that growth has been pretty significant in terms of both the amount of capital. Is there maybe a sexiness factor to it? It's just not as exciting. I don't know. I actually think boring is good when it comes to investing.

I think the boring means you've got a well-structured investment that's been carefully vetted, you've understood the risks, you've got good visibility on the long term. So I don't know that it's a sexy versus boring thing. I think it just is part of the broader maturation and development of the private equity business. And secondaries has been growing rapidly. I think it will continue to grow. It's also, as I say, taking different forms now in terms of it used to be, it was just the purchase of LP positions. We're starting to now see more direct company acquisitions. We're seeing

continuation vehicles. We're seeing other sort of forms of structure that provide that interim liquidity. And we're also starting to see secondaries extend into credit and into infrastructure. That's been slower and I think will reflect the relative maturation of those asset classes. So I think there's still lots of room to run. And I think people are understanding that there is a real value to having secondaries as a component of your broader portfolio. I think from inception, secondaries was a very conservative industry. It was meant to give this kind of banded approach. And I would argue it was overly diversified.

In other words, you couldn't invest into a single asset exposure because what if that asset goes down, which is very likely. There wasn't this portfolio approach to building a secondary portfolio today. That's one of the evolutions I've seen over the last three, four years. No question. If I go back 20 years, secondaries was about solving the seller's problem. You had a seller who had a problem on their hands. Generally, it wasn't related to the individual asset they were selling.

It was some other problem in their portfolio that was creating a liquidity crunch. They were selling what they could. They had some high quality private assets, and they were prepared to take a discount to net asset value in order to generate some liquidity. That was then. You still have some of that today, but what you have is a much broader use of the secondary market, as we talked about, to just provide more routine portfolio management to trim positions, to reallocate portfolios and

other things. And so I think what you're describing is in part just some of that evolution. And so people are building more diversified portfolios of secondary investments. That does enable you to then, in certain situations, by individual company positions. And now we see a range of things from single company positions to fund interest that may have one or two companies still left in them to much more broadly diversified funds. And part of the underwriting then is looking at what type of return do we need for the risk that's represented by those different deal types because they do, some come with high degree of diversification, others are much more concentrated. So the whole market has become more discerning in terms of the underlying risk profile and we're pricing things accordingly. Is there also a packaging aspect to it where a lot of these secondary transactions almost have to stand in of their own versus inside a portfolio? I think that's true.

And I also think the market is becoming sort of more sophisticated in terms of how it's packaging up portfolios and bringing them to market. So what was 20 years ago, individual LP, talking to individual LP, probably introduced by the GP, you now have sort of sophisticated investment banks and intermediaries running processes. And what we've really seen is the growth of the so-called mosaic solution, where the banker will recognize that it's unlikely that they're going to get top dollar from a single buyer buying a broad portfolio and so what they're much more focused on doing is identifying three or four buyers who will have particular views on sub-segments of the portfolio you put all of that together and they can go with a comprehensive solution to their client what it allows us to do

is to really play the advantage of being able to have views on single GPs or single line items within a broader portfolio. We seldom spend a lot of time on very large, broad, diversified portfolios. That's going to attract capital from people whose competitive advantage is able to write a big check. We actually really like those mosaic situations where we're able to say, okay, of the 20 GPs or the 20 funds in the list, we've got a particular angle and view on four of them. And here's how we will price those. Here's the direct relationship we have with those four GPs. we will be the best buyer for those four line items. And increasingly, that's been quite effective as a process tool.

That might be the most shocking thing, investment bankers earning their keep. Well, I'm an ex-consultant and an ex-lawyer, so I shouldn't cast a spruce. I also talk about private credit. It was once the hottest asset class. Now there's this meme in the market that it's overheated and some funds are having problems. Where do you stand on private credit tax? So we've got a terrific private credit program. We've built it up over the last decade, continues to have a really solid value proposition for

institutional investors looking for predominantly floating rate exposure. We do it both from a corporate direct lending perspective, lending to private equity-backed businesses in the mid-market and the lower mid-market. So very consistent with our broader platform themes. We also have a very active asset-based specialty finance business that invests in what I would call our more niche areas like music royalties and health care receivables, litigation finance, factoring. In both of those areas, we see very strong continued institutional appetite for diversified,

well-structured private credit exposure. There's no question, especially here in the U.S., the BDC market and the sort of more retail-oriented funds have had a well-publicized sort of challenges with investor sentiment. But that's a pretty small part of the broader private credit market. And interestingly, through all of the noise of the last six months or so, we've actually seen institutional investors continuing to invest. And in some degree sort of feeding us the opportunity set of presumably this is going to improve market conditions for your underwriting, give you the opportunity to buy

positions on attractive terms and that's exactly what's played out. So I think from a retail perspective, think of this as probably a growing pain as people understand better what they've purchased, but for institutional investors like Northleaf, it's been more of an opportunity than anything else. I almost wonder whether these narratives could be a great buying opportunity, kind of putting my master's psychology hat on. Private credit has almost been waiting for this bubble to burst. There's been narrative. It's going to happen. It's going to happen.

Kind of like with the tech boom for 10 years, people predicted that the next quarter, it's going to happen. And then once there's one or two pieces of information, everybody, there starts to be this contagion of fear. And everyone starts to say, well, look, as I predicted, there's now a bubble. And like any bubbles that burst, there's always the baby in the bathwater. And sometimes the best opportunities are finding where that baby is in the bathwater. Certainly the history in the private market.

over the last 25, 30 years had been exactly as you described, that when there is dislocation, when there is sort of this sense of fear in the market, it generally is a good time to invest. We don't participate directly in the BDC market, so I can't comment specifically, but what I can tell you is, as an institutional participant in the market, we've certainly observed that where people have had challenges with their sources of capital, they've had to adjust their investment activity, they've become sellers in certain circumstances, or they've just become less aggressive buyers. Both of those dynamics have been to our benefit and others who are sort of participating

as institutional investors in the market. This goes back to when you spun out in 2009, obviously on the heels of the global financial crisis. How did that affect Northleaf? It was a really good lesson in the need to stay very close to your investors. and really understand sort of what they were looking for. We were very fortunate to have as our largest investor, the Canada Pension Plan Investment Board. They started a program with them in 2006.

I remember the conversation I had with them when we were spinning out to become an independent firm in 2009, and they said, look, we liked you well enough to invest with you when you were part of the bank complex. We were part of Toronto Dominion Bank. We like you even more as a potential independent. So get your spin out done, come talk to us, and we'll look at reinvesting and re-uping in the mid-market private equity program that we run for them. And so that was obviously a huge advantage for a small firm that was just setting up as an independent.

And I've never forgotten the support that they provided. And it was a very good lesson that you stay close to your investors, stay close to what they're looking for you to provide for them. And you can co-create opportunities and co-create partnerships. And that really did set us on the path to the success we've had over the last 20 years. Perhaps not the question, but why do you think Canadian pension plan made a bet on you? It was a combination of they had a specific objective that they were looking for. They wanted exposure to mid-market, private equity. They wanted exposure to Canada.

And they recognized that the scale with which they were growing was going to make it really hard for them to invest efficiently at scale in mid-market opportunity. So they needed a partner and they wanted somebody who they could rely on as being in their domestic market and extension of their team. And I think over the years, we've built that trusted relationship with them. We've co-created the program. We've evolved it as their needs have changed. And that really has become not a transactional every four years we raise a fund, but a much more integrated, much more partnership. We're now on our sixth iteration of that program. It's growing to be almost $3 billion. We just celebrated our 20th anniversary of that

partnership earlier this year. But each step of the way, the program's mandate has evolved, the areas of focus have evolved, in part to respond to how the Canadian market has changed, but in many ways it's evolved to reflect the changing objectives and the changing portfolio construction approach of the client of CPP. And so the ability to work with them and build that kind of customized evolutionary partnership over the years, that's been the root of it. We're not offering them the same thing that we started with in 2006 because they're not looking for the same thing that they were looking for in 2006.

Is that a push and pull or a dance of sorts? For sure. I mean, and it's true, we have similar programs with others on the infrastructure side and in credit. And in every case, it's a truly is a collaborative co-creation exercise where you really need to understand what they're solving for. And then you need to set up the regular cadence of reviews and discussions so that you stay close as things evolve. and that's the beauty of working on a more bespoke basis with larger pools of capital is you can evolve and adjust and be agile as you go. And that's what creates the permanence of the relationship is the fact that it is dynamic, it's organic. And we continue to stay very focused on. We are an extension of their team. We are a representation of their investment's philosophy and their investment strategy. And it's worked out exceptionally well.

A lot of GPs struggle with this theory of mind of the LP and understanding the LP mind. What's one of the most underrated aspect about understanding how LPs think? For us, a great example is if you think about how the business has evolved. So we started, as I mentioned, with private equity, secondaries, co-investments. In 2010, we launched our infrastructure business, and in 2016, we launched credit. In each case, that was an investor-led expansion. So in 2010, we had a number of our existing private equity investors approach us and say, look, we're starting to think more about infrastructure as an asset class.

Our asset consultant has just left the building and tells us we need to be 5% in something called infrastructure. Could you help us think about that? And so we did. We spent almost two years working with them to really understand what was it about infrastructure that they were looking for, what were they not getting from the number of opportunities that were in the market. and so we design something that today has turned into a $10 billion infrastructure program

with the support of some of those same investors, as well as now investors from more than 20 countries around the world. But it was very much an investor-led expansion of the business, and private credit was no different. That again was a situation where we had a number of our core investors saying to us, look, we're seeing what the big pension plans on the large capital allocators are doing in private credit, what's Northleaf's approach? You seem to have a number of the intrinsics here. What's your plan? And so that again is today, again, almost a $10 billion business for us, but that's on the back of listening to investors.

And if you have an investor approaching you with an idea, you're able to develop something that fits their solution, that goes a long way to ensuring success of the ultimate new fund launch and the ultimate build is because all you're really doing is reflecting what your investors are asking you for. So your investors came to you originally with private credit, then with infrastructure with this demand. How did you assess your right to win the market? Well, that was a large part of it, was saying like what for, so for infrastructure, for example, it was a question of what is the market missing? And we identified pretty early on that there was this inevitable trend of the early movers just adding more and more scale.

growing more and more quickly and in many ways growing out of the mid-market space where they originally generated the strong returns and the track record. And so part of our thesis and ethos really has been staying focused in the mid-market. Yes, we've grown a lot in terms of capital, no question, but we have never grown out of our sweet spot. And the importance for us of making sure that our growth is sustainable in terms of enabling us to continue to generate a premium return, continuing to generate all of the other advantages of being a mid-market specialist. I think that's been a really important element to it. And we've seen that gap emerge and be reinforced in all of the different asset classes that we invest in, that being a global player

with resources, but a commitment to staying at a size and scale, that makes us an agile mid-market player. That's been at the guts of it. So in infrastructure, you saw this gulf of capital between mid-market and the very large projects. There was just not enough capital going after that. Well, you look at the, if you pick the great names in infrastructure today, if you go back 15 years, they weren't raising $30 billion funds.

Goes back to what you said before all the capital going to those. Precisely. So that, their success, and they've had huge success, right? but they have taken that and they have translated that into funds that are now 15, 20, 30 billion dollars. And if you're managing a $30 billion infrastructure fund, you are not competing with Northleaf for a $250 to $300 million check, even in the most attractive asset. The math just doesn't work for you. That's not how you're building your business. And so the recognition that their growth was going to leave a really interesting segment of the market, not uncompability.

It's always competitive, but the competitive dynamics are fundamentally different in that middle market space. There's more inventory. There's less efficient processes. They're not translating the SIM into 35 languages and sending it globally. Like all of the dynamics around the acquisition, the sourcing, the relationships with the management teams, all of those are in relative terms, much more advantageous in the mid-market. and then you get to the point we talked about earlier where you do a good job with those assets. All of those large cap funds are looking to buy mid-market assets that have grown enough to be relevant to them. All of the large sovereign wealth funds and pension plans have direct infrastructure teams that are looking to buy mature, well-structured assets that have achieved sufficient scale. The big industrial operators, the developers, like there's just the universe of interested buyers

just is magnified. And so that's the role that we play is we'll take that small asset. We'll do the hard work to bolt on two or three complementary projects or assets. And we'll get it ready for prime time, if you will, if, and by prime time, we mean a competitive sale to a large pool of capital. Such an underrated point is a lot of people are looking at the retail capital going into the large managers. And a lot of institutional investors are scared by that. what happens when $10 trillion dollars go into large buyouts, is there going to be still alpha left in that asset class?

But they don't think of the second order effect, which is now if these funds have trillions of more dollars, they have to deploy them into something. What are they going to be deploying it? They're not going to deploy in the public markets. They have to be buying mid-market assets. So those assets are actually going to get a bit. You asked the question earlier about sort of being boring or whatever.

I think boring is a skill. Because if you think about it from a process perspective, I don't want to be engaged in an exciting auction. I don't want to be in a best and final offer round with a high stakes assessment of whether we can pay the top dollar or not. The only time I want excitement is when we come to sell. And when we come to sell, I want an enthusiastic buyer group. And for all the reasons you mentioned,

that's exactly what this market is producing. And between buying it well, hopefully in a less competitor, process and working hard to de-risk and to build and to develop the asset, I want all of that to be drama-free, boring, consistent, predictable. And then we can have an exciting sale, but between acquisition and sale, the more boring, the better. At this fascinating three-and-half-hour dinner with one of the chairmen's of the largest investment banks here in Midtown, and he's delivered over 20 percent compounding returns over three decades. He's done two deals with Warren Buffett. He's one of the top investors, really, of the

20th century. And he defined his strategy as looking for things that are boring or hard and ideally both. That's a good way to put it. I always often think of infrastructure as being something that's relatively easy to describe. It's relatable. People understand a toll road. They understand a wind farm. It's not a trading strategy. It's not a complex algorithm. But it's hard to do well. And it's hard to do consistently. It's hard to do patiently. It's hard to do patiently. It's hard to do. proactively. But if you do those things well, you end up with exactly what he describes, which is a pretty interesting investment proposition and one that has a lot of runway in the current environment and the secular tailwinds that we talked about of the big investment themes

that are going to play out, not just over the next 12 months, but over the next 10, 12, 15 years, those are all really positive from an infrastructure perspective. Let's talk about something not boring, venture capital. You're deploying roughly a billion into that strategy. You have a very unique approach to it. Tell me about that. So our venture program is predominantly focused in Canada. That's been, again, predominantly a result of having a number of large investors, the Canada Pension Plan in particular, who are looking for domestic venture exposure and looking to take advantage of the fact that the Canadian venture market by and large has been relatively underserved and overlooked

compared to the obvious success that's been had in Silicon Valley. And so for the last, it goes back down to 2008, we've been an active player. In the venture space, we invest in third-party funds, we're an active buyer of venture secondaries, and then we'll invest directly as a co-investor into later stage and growth-stage businesses. And that's proven to have been a very attractive part of the market for us to participate. Just to play devil's advocate, isn't venture all? about finding the next anthropic, SpaceX, Open AI?

There's no question that Venture lends itself to a higher dispersion of returns, certainly than buyout and definitely than infrastructure. It's hard to argue with the historical stats of you've got to make sure that you've got 10% of your outsized winners. I think that's true at the very early stage. As you get later on, as you do more late stage and into growth, I think that moderates a little bit. But there's no question. You have to take a diversified approach. You have to think about placing your

initial investments more broadly to ensure that you're getting enough signals back about where the outsized winners are going to be and then making sure that you've got your funds structured in such a way that you've got capital available to support those winners as they emerge. This 25-year prolific career in the private markets, what does compounded the most for your career? If I think of the thing that's sort of compounded the most, it's been people. And that's been true, not just in terms of the broader relationships that I've been fortunate to develop, but the people that I've been fortunate to work with. I mean, when we started, there were five of us.

There's now over 300. We were in one office. We're now 10 offices globally. And it's the compound effect of the contribution of a lot of really talented people who've chosen to commit a good chunk of their career and their professional growth to Northleaf and to building what we've built today. That's been the most dominant theme, I think, of my career. And one that has had the largest success on the firm has been just the caliber and the quality of the people

and the relationships that we've been able to build then with the investors that we serve. How have you been able to retain your culture as you've gone from five people to 300 people in 10 offices? That's a great question, and it's one that we actively discuss and debate as a leadership team. The biggest factor has been, we've been intentional about it. One of my partners and co-founders always reminds us that you're going to end up with a culture. It's either going to be the culture that you want to have or the culture that you allow to happen. and ours isn't perfect by any means. It constantly has to be improved and nurtured and developed.

But the fact that we actually aspire to a specific culture, that we strive to maintain and preserve that culture, that we do talk about it, both when it's working and when it's not working, I think it's that mindfulness and that long-term commitment to making it better is it the crux of it. It's kind of like a marriage. You have to constantly work on it.

You can't just get it to a good place and just let it. No, the minute you do that, it starts to erode. And I think that's part of the exercise as well, is as we have been able to recruit so many good professionals over the years, part of the exercise and part of the success is putting the culture on display during the recruiting process so that people have a very clear sense of what they're getting and they can opt in or in a small number of cases, opt out. Like if you're looking for the what you kill aggressive culture,

then you'll end up going somewhere else. And the sooner you recognize that, the better for everybody. If you're looking for something that's hardworking, meritocracy, but done in a way that's respectful and collaborative and has a real partnership dynamic to it, you will see that in the people that you meet. And you will inevitably, you know, opt in or out, as I say. but putting that culture on display during the recruiting process is, I think, a really important element.

Something I see across all the great organizations I interview is this maniacal focus on what is the culture and maniacally focusing on polarizing people against that culture. In other words, standing for something means that you also don't stand for anything else. And you could argue there's no real good culture or bad culture. There's just you have cohesive culture and it has to fit the market that you're going into. It has to fit the way that you want to do business. That's the critical piece. It's like founder culture fit.

A little bit, yeah. And again, one of my partners always reminds me, if we don't like the people that we work with, we only have ourselves to blame. We've been fortunate to build the business now from five people to 300. And there's been an awful lot of people who have come in and had huge impact on building out the business

and generating a positive and successful shared outcomes with our investors. And I think that's another piece of the culture that's really important is the ability for people to have impact and the ability for everyone to understand that their impact matters. That every one of us as a day-to-day contributor can either tilt the culture positively or negatively and everyone has a responsibility from the time they join Northleaf. They are now part of that positive culture. That's what has attracted them to the organization. Now it's on each of us to continue to build and foster that day and day out. Do you find this left tail in bad hires that one bad hire could truly wreak havoc in an organization?

Yes. Yeah, there's no question that even... What's an example without giving me an age? Well, I mean, fortunately, I think we've been able to screen a lot of that out during the interview process. And it doesn't, it sounds pejorative to say bad hire, but I would say even something that's not an optimal fit. somebody who comes in and has a different investment style, desire, for example, to take more risk in their investment

activity than where the firm's positioned, even though sort of misalignment can be a good person, can be a good performer, but if there's a misalignment in terms of their vision and where they want to take their career and their firm, those are just hard. It takes a while to truly put your finger on that. And then it generally takes a long time to extricate the individual from the role. And then it takes time to backfill. The opportunity cost of redoing that takes a while. So there's no question that the old Mary and haste repentant leisure. There's an element of that, I think, from a recruiting perspective. It's one of those things that's hard to internalize until you've done it. Yeah. We always say we make lots of mistakes. You try not to make the same one twice. If you go back to 2001 when

you have first started the group within TD with your partners. What is one piece of timeless advice you'd give a younger Stewart to carry through your career? That's a good question. I would say the biggest thing you have to do is you have to be patient. And it doesn't mean you have to be slow. It doesn't mean you're unambitious. It doesn't mean you don't have aspirations. You have to recognize that especially in the private markets, you build success one step at a time. and you can't push investors to a timeline that they're not on. You have to be patient and react. You can't force investment outcomes.

Things take time to build. We are in a long-term asset class. Any time that I've gotten impatient and I've tried to force things, you end up with a suboptimal outcome. Maybe patience comes easier as you get older, but certainly when I was younger and earlier in my career, I was in a rush to get everything done. And that lesson of patience, the lesson of being really thoughtful about what types of businesses you get into, what types of people you hire, the way you serve

investors. I think that's a critical bit. And there's a terrific quote that was attributed to Churchill, which I've adopted for the use in the private markets. It says, I'd far rather go through life wanting what I don't have than having what I don't want. And if you think about that as a lot of long-term investor in the private markets, I'd much rather have missed out on something than have bought something that I regretted, that underperform. Because the time it takes back to your point about hiring, it takes even longer to work through a difficult asset or an asset that doesn't fit with your program. And so being patient and never sort of falling into the fear of missing out is, I think,

a really important career lesson. It reminds me that Jeff Bezos framework about there's some door. are one-way doors where you come in and you can't go back. And there's some doors that you come in, you could come out, and you should go fast in the decisions that you could reverse and go slow in the ones that are one-way doors. That sums it up. It sums up the private markets, pretty much. For sure.

And most private markets investments, they're not always one-way doors, but it's not an easy. You can't trade out of it the next morning if you have second thoughts. Sure, there's been an absolute masterclass. Thanks so much for jumping on. Thank you.