When sister publication Infrastructure Investor interviewed London-based Infracapital co-founders Ed Clarke and Martin Lennon in December 2017, the pair had recently realised the firm’s maiden £908 million ($1.1 billion; €997.5 million) Infracapital Partners I fund.
The sale of Dutch telecoms firm Alticom had completed the process, but there was a tinge of sadness between the two, who compared the realisation of the fund to seeing one’s oldest child leave home for the first time.
The 2.1x capital returned to investors would have helped soothe the pain, but the point remained. However, fund managers are increasingly choosing not to say a full goodbye to their vehicles, or at least keeping them in the family in some way, shape or form. Fund continuations, rollovers and fund restructurings are increasingly part of a GP-led secondaries world that has found a new lease of life in the infrastructure market. With the relatively young asset class maturing, managers are looking beyond the traditional asset-by-asset sales process when it comes to realising funds.
In data released this year by advisor Greenhill, infrastructure formed the second-largest segment of GP-led transactions by strategy in 2018, at 17 percent.
More broadly in the secondaries world, purchases of infrastructure fund stakes grew 68 percent year-on-year to $3 billion, according to a separate report from advisory group Setter. And some 10 percent of the current Infrastructure Investor 50 – a ranking of the largest equity fundraisers over the last five years – have undertaken a fund continuation or GP-led secondaries deal.
Life at the end of the tunnel
Although such transactions are growing in frequency and scale, they are still very much in their infancy. As a result, each deal has its own idiosyncratic motivations. Still, if we were to try and sum up the underlying factor underpinning their growth, our assessment would be likely to echo that of James Wardlaw, vice-chairman of infrastructure at placement agent Campbell Lutyens, which has advised on the bulk of these deals to date.
“I think it stems from the fact that the natural life of a lot of infrastructure assets exceeds the natural life of an infrastructure fund,” he says. “There’s a natural issue of what you do with the assets when a fund comes to the end of its life. Often it’s with assets where there’s still runway left and there’s things a manager can do to add value.”
This was the case in both July and December 2017, when Dutch pension manager APG bought the whole portfolios of funds in which it was an LP from compatriot DIF Capital Partners and French manager Ardian, respectively.
“It requires a win-win-win. It’s got to work for the people that want to sell, the manager and the people that want to buy. If it doesn’t work for any of those parties, it will fall down”
The first of these deals saw it acquire the 2008-vintage DIF Infrastructure II portfolio, which was worth about €700 million and is now housed in a new 25-year vehicle. The second deal, for which it teamed up with AXA, saw the acquisition of the 2008-vintage AXA Infrastructure Fund II, raised by the Ardian team when it was still part of the French insurance group.
APG declined to comment for this piece. Its motivations, however, look obvious. After all, these were two cash-generating portfolios that APG knew well, with the Ardian portfolio delivering a 10 percent annual yield, the French manager told us at the time.
For the vendors, though, is it not better to capitalise on what’s often decried as a seller’s market and offload their assets piecemeal? “We offered the fund in parts; to acquire the euro-portfolio separately, the sterling-portfolio separately, or the whole portfolio, with or without the A63 toll road,” explains Allard Ruijs, partner at DIF Capital Partners. “There were four or five parts people could bid on. We also had institutions that could submit bids based on a certain discount-rate model devised with Campbell Lutyens.”
At Ardian, it was a little clearer which was the best way to realise the portfolio.
“Selling it altogether was a way to maximise value giving access to diversification to the buyers while also reaching buyers with lower cost of capital,” reasons managing director Marion Calcine.
On both occasions APG chose DIF and Ardian to continue managing the assets or perform advisory roles, thereby netting them fee income – albeit significantly less – from assets they know are reliable.
When Italian infrastructure fund manager F2i began raising its third vehicle in December 2017, it came up with a rather different solution to continue benefiting from the assets in its 2007-vintage maiden fund. The group merged Fund I’s remaining assets – comprised of gas distribution, airport, toll road and renewable energy companies – into its third fund. That allowed Fund III to hold a €3.1 billion first close comprised of €1.7 billion from Fund I investors and €1.4 billion from new LPs.
In a first for the asset class, F2i III thus became both a new fund and a continuation of its debut effort, which had been nearing its end. The first fund had been generating a 12.4 percent IRR and a money multiple of 1.8x when F2i pooled it with Fund III.
“The case for continuation was compelling for all parties,” says Lucien Cipollone, associate partner at Capstone Partners, which advised F2i on the process. “There were mature assets that made it easy for incoming investors to analyse performance and rapidly deploy capital. The fund was coming to the end of its life and contained assets that are the ‘crown jewels’ of Italian infrastructure. At the same time, there were opportunities to further enhance the value of the existing assets.
“We are very transparent with our LPs. They had the options on the table and were able to be part of the decision. We had different bids and we showed the LPs those bids. That’s how we go through such a process”
DIF Capital Partners
“It also suited the broad investor pool, some existing investors needing to rebalance their exposure to the asset class and some others requiring immediate liquidity. Furthermore, there were incoming investors who wanted exposure to Italian assets but couldn’t access them adequately. Finally, it was working out well for the manager to raise new blind pool capital as part of this operation.”
The F2i continuation perhaps reflects two of the most common motivations for undertaking such a move, with both the fund approaching the end of its life and the GP wanting to offer investors a liquidity option.
Despite being the common causes of deals today, neither end-of-life nor liquidity considerations were behind one of the earliest continuation vehicles. In 2012, London-based InfraRed Capital Partners raised £500 million for the InfraRed Infrastructure Yield Fund, which, like the DIF II portfolio, housed a number of PPPs and renewable energy assets.
“The assets had come through the development phase and we created a continuation fund for the remaining life of those assets, which appealed to a different type of investor with a lower cost of capital,” outlines Wardlaw.
“We felt this would give new investors something unique while creating best value for existing investors,” notes Harry Seekings, co-head of infrastructure at InfraRed.
This article first appeared in the October issue of sister publication Infrastructure Investor. Stay tuned for part II.