$10bn ADNOC deal ‘protected’ against commodity volatility, GIP’s Ogunlesi says

The UAE pipelines purchase – one of the largest deals of the year – brings GIP III close to full deployment, as the fund suffers the effects of the coronavirus pandemic.

Global Infrastructure Partners is betting on natural gas pipelines in the Middle East as one of the final additions to the firm’s $15.8 billion third flagship fund, which has seen interim returns fall amid the coronavirus pandemic.

The New York-based fund manager led a group of investors this week in a $10.1 billion purchase of a 49 percent stake in 38 gas pipelines in the United Arab Emirates, in what is probably 2020’s largest infrastructure deal to date. The seller was state-owned Abu Dhabi National Oil Company.

“This is an investment in UAE’s existing and future industrial strategy,” GIP’s founder and managing partner Adebayo Ogunlesi said in an interview with Infrastructure Investor. “It’s a link between all of ADNOC’S producing fields and downstream activities.”

Deepak Agrawal, a partner at GIP, led negotiations for the investor consortium, which includes Canada’s Brookfield Asset Management and the Ontario Teachers’ Pension Plan, Singapore sovereign wealth fund GIC, South Korea’s NH Investments and Securities and Italian natural gas company Snam SpA.

Sources familiar with the transaction told us GIP took a 20 percent stake in the company used to acquire the pipelines, with the five other investors involved in the deal each purchasing around 5 percent. Ogulensi, however, would not comment on the consortium breakdown.

The group agreed to a fixed-rate fee, which has not been disclosed, based on the volume of natural gas that the pipelines transport. The contract also features a minimum volume guarantee from ADNOC, according to Ogunlesi, which is set at just enough to cover the $8 billion loan that investors secured to help pay for the deal.

“We like the steady cashflow profile that a transaction like this provides,” he said. “If commodity prices go up, terrific, but we won’t make more money from that. But if they go down, we’re protected.”

The deal values the pipeline assets at $20.7 billion. Servicing the sixth-largest natural gas reserves in the world, ADNOC’S pipelines span almost 1,000 kilometres, mostly connecting offshore drilling fields to onshore refineries and liquefied natural gas facilities in the UAE.

It is part of a broader strategy for UAE to diversify its economy away from oil production while at the same time attracting foreign investment. Last year, the energy company agreed to sell a 40 percent stake in its oil pipelines to BlackRock and KKR for $4 billion, a joint venture which later brought on GIC.

But the deal comes amid ongoing economic disruption from the coronavirus pandemic, which has hit the energy sector hard and raised questions about the volatility of US midstream investments in particular.

Fund III takes covid hit

ADNOC is the ninth investment from GIP III, which closed fundraising in 2017. GIP has used the vehicle to invest in assets including the Hornsea offshore wind farm in the UK; US midstream companies Medallion and EnLink; Singapore-based renewables company Equis Energy; and Italian high-speed rail business, Italo.

The firm is targeting 15-20 percent gross returns, but as the coronavirus pandemic has stifled the global economy, GIP III’s performance has suffered as well, according to documents published by institutional investors committed to the fund.

At the end of April, the investment vehicle had generated a 1.26 percent net return in 2020 for the Alaska Permanent Fund Corporation’s $500 million commitment, according to documents the LP made public. A report from the Maine Public Employees Retirement System showed GIP III returning a net interim internal rate of return of 7.2 percent at the end of 2019.

Falling returns can be blamed on the fund’s public markets exposure, according to Ogunlesi, who noted steep stock declines in the US midstream companies, Spanish gas utility Naturgy Energy and Clearway Energy, a renewables platform previously called NRG Yield. He also said Italo has suffered from Italy’s lockdown orders during the pandemic.

“I’m not particularly fussed by quarter-to-quarter results,” Ogunlesi explained, adding that GIP III’s hold period lasts seven more years.

“Our expectation is that these businesses are solid businesses with more than enough liquidity to weather an extended downturn,” he said. “Lack of liquidity is what kills companies. These businesses will recover.”

Enough capital remains from GIP III to make one or two more deals, Ogunlesi added. In January, GIP closed its latest flagship fund, GIP IV, on $22 billion, the largest closed-end infrastructure fund ever raised.