Pantheon backs £551m fund to further foster three infra assets

Pantheon has led an infrastructure deal involving three of the UK-based assets held in Ancala Partners’ 2017-vintage Ancala Infrastructure Fund I.

In the process, London-headquartered Ancala opted to create a new strategy around the assets rather than a regular continuation fund, or a simple realisation.

Ancala Essential Growth Infrastructure Fund will help further develop utility Portsmouth Water, anaerobic digestion platform Biogen, and last-mile utility network provider Leep Utilities, all of which need additional equity and debt to grow, according to Ancala managing partner Spence Clunie.

The vehicle launched six months ago and has just closed at the targeted £551 million ($700 million; €743 million). Interest in the fund was such that the fundraising was oversubscribed, and investors’ allocations had to be “scaled back”, Clunie tells Infrastructure Investor.

Despite the new fund targeting an ambitious 15 percent internal rate of return, the original Fund I investors all took the liquidity option, explains Clunie: “A lot of the original investors were UK defined benefit pension schemes, and they wanted liquidity.”

Clunie acknowledges that the new fund is not a usual infrastructure strategy and says that “the market for a fund such as this has been shaped by the market for continuation funds. This new growth fund goes one step further to support the expansion plans of these companies.”

He is keen to stress that the fund has raised new money and that the purpose isn’t to wring out the very last drop from the assets: “There are eight to nine years left in these assets in the current fund, and the new fund has a seven-year term. We thought that we could deliver more value to these three well-performing assets by keeping them on and investing in their growth.”

Portsmouth Water has the highest public profile of the three assets. The company is building the first UK water reservoir in more than 30 years. It secured £325 million of debt financing a few months ago, and £120 million of equity is now being invested to finance the reservoir and a smart metering programme. The investment in these projects is being added to Portsmouth Water’s regulatory capital value.

It follows the UK water regulator Ofwat’s listing of the company as one to be monitored and engaged with over its financial resilience. Ofwat said its decision “reflects largely the scale of the Havant Thicket reservoir undertaking relative to RCV and its complexity”. This would be helped by additional equity. Also, “an inflationary market has added to the costs of the development”, says Clunie.

Given the current state of the market for UK water, it may be a surprise to many that any agreement could be found between the regulator and a private market portfolio company, and lessons must have been learned. In any case, a sustainable solution for how to fund new and much-needed water reservoirs in the UK would be appreciated by all stakeholders.

Careful valuations

The choice of grouping these three assets in a fund rather than allowing direct investments into one in particular was taken to allow investors access to a diversified pool of assets, says Clunie. The eight investors in the new fund are from Europe, Asia and the US. Lead investor Pantheon “put in a substantial amount, having also invested in flagship funds II and III”.

“Because of the similarities to a continuation fund, the GP commitment to the Growth Fund tops 2 percent,” says Clunie, adding that the funds were provided by employees across Ancala.

It is no small feat to get buyers and sellers to agree on not one but three infrastructure asset valuations these days, and Ancala was able to pass the three assets from one fund to another. Rothschild & Co acted as the adviser on the transaction.

Following the agreed transaction prices, the original investors walked away with double-digit IRRs and new investors poured in, says Clunie. “We launched six months ago in what is now a soft market, and it was easier to raise the funds than it would have been with a blind pool. It speaks to the quality of the assets and the trust our investors have in our asset management approach that we ended up oversubscribed.”

The three assets in the Growth Fund are inflation-linked, something which Clunie acknowledges could – through its active asset management approach – not only provide protection in the current environment but possibly improve margins.

With the Growth Fund already closed, Ancala Partners’ third flagship fund remains in market.

This article first appeared on affiliate title Infrastructure Investor