What role does private capital have in reducing the funding gap in European infrastructure?
It is estimated that Europe needs to invest about €270bn a year between now and 2030 to build new infrastructure and to maintain the existing network. A significant amount of this investment requirement is expected to be funded by private investment, which will play a vital role in driving economic growth and global competitiveness.
How is competition for deals driving changes in the market, and has it altered your investment approach?
The market has certainly evolved as a result of growing competition, and what you see now is even more variety in investment strategies as a result. There’s differentiation by geography, sector and risk/return appetite, with strategies such as core, core-plus, super core, and value add to address specific segments in the marketplace. That kind of specialization reflects, to a certain extent, the challenge of demand for assets vs. supply.
We have positioned ourselves quite deliberately to participate in the mid-market, which we define as businesses of up to about a billion pounds (or euros) in enterprise value. Here we see the biggest proportion of opportunities to find or create assets and to drive value creation to deliver attractive investor returns.
What value creation opportunities do you see in the infrastructure space?
There’s enormous potential, and I’ll make three points about that. First, value creation starts with good origination. We operate in two core strategies: greenfield – which is about building and delivering new infrastructure – and brownfield, which is about acquiring operating infrastructure. Across both strategies, we go out into the marketplace and proactively procure opportunities. With our brownfield strategy, about one in three of our deals have been proprietary. On top of that, about another third are what we call ‘limited competition.’ Instead of full-blown auctions, you can get to a one-on-one, bilateral conversation relatively quickly and look to avoid squeezing the last penny out of the bid price.
On the greenfield strategy, about 60% of our deals are non-competed. That’s because we work extensively with developers, construction companies, entrepreneurs, and corporations and position ourselves to understand where the deal flow is coming from and when. We seek to help to get development-stage propositions to the late stage where they're more or less certain to happen, but where we can still influence key elements around construction and financing. Over time, you are able to form strategic alliances or joint ventures and become a trusted financing partner. From a value-creation point of view that's incredibly powerful, because you avoid the cost of competition.
Second, there’s creating value through delivery. In a greenfield context that’s delivering a construction project, a network buildout, or taking a pre-operating opportunity and making it operational, so if delivered successfully, you should benefit from a reduction in the risk premium when you sell. In a brownfield context this refers to situations where delivery is "complex", but where there’s the potential to improve the asset, de-risk and drive value. That could mean carving out a division from a corporation, putting in place a new management team, implementing a new billing system, and for creating a standalone company.
The third example is the platform approach, which involves growing a small- to mid-cap company and transforming it into a real leader in its sector. If you can show that the growth that you've delivered is expected to continue you can drive some very exciting returns. We see this a lot in our greenfield strategy – we start with constructing assets, but with a view that these become multi-asset platforms where you can put in place quality management teams and drive synergies and efficiencies.
Let’s talk about ESG. How do you see its role in the industry – is it seen as an optional extra, or is it more critical than that?
I think we need to take the ESG opportunity as far as we can, because infrastructure provides us with a relatively unique opportunity to make a positive impact on the environment and society. At Infracapital, we issued our first comprehensive ESG report to our investors last year, and we've identified a set of KPIs that we want to manage and measure transparently across our portfolios and within our team. These KPIs include, for example, climate impact, diversity, employee wellness, data, cybersecurity.
For those measures, we will be looking at equivalent businesses and industries to see where there are differences, so that we can use best practice. It’s a huge advantage having a large portfolio of companies; while one might be a broadband business and another might be a waste-to-energy business, some KPIs share common features. And if one business has an effective solution, we can share learnings and help others come up to that standard. What we want to drive is ongoing improvement across those KPIs, so that every asset is proactively looking to deliver best practice across the board.
This article is taken from the 2020 Preqin Global Infrastructure Report. For more expert commentary on the infrastructure industry, please visit preqin.com/gir
Infracapital invests in, builds, and manages a diverse range of essential infrastructure to meet the changing needs of society and support long-term economic growth. We take an active role in all of our investments, whether nascent or large, to fulfill their potential and ensure they are adaptable and resilient. Our approach creates value for our investors, as we target investments with the scope for stable and sustainable growth. Our portfolio companies work closely with the communities where they are based, to the benefit of all stakeholders. Infracapital is well positioned to deliver the significant investment required to help build the future. The founder-led team of experienced specialists has worked with more than 45 companies around Europe and has raised and managed over £5bn across five funds.
Infracapital is part of M&G, a leading European savings and investments business. M&G manages the long-term savings of more than seven million people and is a major investor in the UK and in the global economy. Total assets under management are £341bn (as at 30 June 2019).
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