It’s crunch time for infrastructure general partners and a watershed moment for infrastructure as an asset class. With 2016 in full swing, a significant batch of vintage 2006, 2007 and 2008 ten-year funds are about to come to market and answer the question on many a limited partner’s mind: will infrastructure deliver on its promise?
We are keen to analyse how those funds performed ourselves once a significant number of exits have occurred, but right now we want to talk about a growing trend we are seeing in the exit space, which, for want of a better term, we’ll call the ‘rollover’.
Increasingly, infrastructure GPs with first-time vehicles coming to the end of their life cycles are looking at exiting them wholesale, as opposed to doing piecemeal asset sales. They are aiming to do this by rolling over existing assets into brand new vehicles – with a lower risk-return profile and a longer duration – which they then open up to new LPs through stake sales.
It’s not hard to see what these GPs are thinking here. With the initial de-risking work done (hopefully the kind that gives carried interest a good name), most if not all of the original assets have now stabilised and are generating yield.
Given the tremendous appetite and availability of many LPs to write big cheques for low-risk, long-dated yielding assets, these new structures can be a much better exit option. Not only does it save GPs time compared to an asset by asset exit, it also allows original LPs to capitalise on the strong demand – and the higher prices that come with it – prompted by the historically low interest rate environment. Plus, the original GP can still run the assets and charge management fees, albeit lower ones.
An early, though slightly different, example of this type of exit structure was seen in November 2014, when Dutch fund manager DIF sold its maiden infrastructure fund, DIF PPP, to Aberdeen Asset Management. The difference is that Aberdeen, not DIF, will be managing the fund’s 16-asset portfolio on behalf of single LP owner APG, the Dutch pension provider.
Of course, it’s equally easy to see the downsides of these new exit structures. One investor who has been exposed to them warned that, while they are usually presented as thoroughly de-risked, not all of the assets that get transferred into them are as risk-free as claimed, especially when it comes to ports, toll roads and other GDP-correlated assets.
The investor also complained that these new 15-year plus exit vehicles have the potential of taking a significant amount of quality core brownfield assets off the market – at a time when demand for these assets already vastly outstrips supply. One of the advantages of traditional exits between 10-year funds is that assets keep getting flipped every five or so years. That ceases to be the case if a sufficient number of GPs elect to lock them up for the long term.
In the end, a good GP can add tremendous value to an asset. Which is why it’s unsurprising to see so many GPs snap up each other’s assets when they come to market, a recent example being AMP Capital and Infracapital’s acquisition of EQT Infrastructure’s Adven sustainable energy business.
In fact, a good GP can be crucial to realising an asset’s hidden potential. Just look at German motorway services operator Tank & Rast. “Was it a retail business? Was it a real estate business? Was it an infrastructure business?” Terra Firma director Robin Böhringer told sister publication Private Equity International, recalling the bemused market reaction when the firm bought it in 2004.
After years of ironing out the asset’s kinks, together with REEFF Infrastructure, that question was answered decisively when it was bought for €3.9 billion last year by a consortium of classic direct infrastructure investors. Who doesn’t want a chance to bid for that kind of value creation?
Bruno Alves is the editor of Secondaries Investor‘s sister publication Infrastructure Investor.