Ardian: European expertise, US opportunities

This article is sponsored by Ardian

Q Ardian raised its first fund dedicated to North America in 2018. What makes this an attractive market for you?

Mark Voccola: There are a tremendous number of opportunities in this market right now, across an ever-broadening definition of infrastructure. That’s being driven by several key trends.

First is the energy transition – the increasing amount of renewable energy and gas-fired power generation in the US, and all the infrastructure associated with moving that around. We see opportunities in everything from pipelines to gathering systems and transmission lines, as well as generation itself.

The other major source of dealflow that we see is around telecommunications infrastructure, driven by the huge acceleration of data consumption that is taking place in an increasingly digitised economy.

Q Do you primarily focus on the US, or do you see opportunities in Canada as well?

Stefano Mion: We tend to focus more on the US. The Canadian market is well developed in terms of opportunities for public-private partnerships in a wide range of sectors. But there are also competitive advantages for local players that can make it complicated for international funds to make inroads. Given the scale of the US market and the sheer number of opportunities, that is where we spend the majority of our time.

Q How would you describe the renewables story in the US right now?

SM: The US is the biggest consumer of electricity in the world, but renewables still have a very small share of the market. That is unsustainable. If you consider the growth potential of wind and solar in the country, as well as developments in energy storage, being active in the renewables space is a must.

“Most of the power generation opportunities in the US are going to be either gas-fired or renewable”

Mark Voccola

We see a wide range of opportunities. There are still a lot of greenfield projects being developed, taking advantage of the tail end of the current system of tax incentives. There is also a good market for brownfield opportunities.

We have reached a point where there are assets in the market that are more than 10 years old. Those assets have a track record in operation, which eliminates some of the volatility associated with this sector. In particular, there are a number of assets coming towards the end of their tax incentives, which creates a natural transition for a new capital structure and new ownership.

We are also seeing the aggregation of independent power-producing companies, and this is one of the areas where we have invested. To date, we have aggregated renewables assets with an accumulative 800MW in operation and we continue to study more opportunities in the sector.

At the same time, we see local and international utilities that have historically been major players in the US renewables space looking to rotate capital in order to play more on the energy management side. That is creating dealflow opportunities too.

Q What about the conventional power market? How is that sector evolving?

MV: The US market has moved away from coal, primarily for economic reasons. The abundant availability of low-cost natural gas has changed the power generation mix over the past decade and we are seeing both greenfield and brownfield opportunities arising from that.

On the greenfield side, those opportunities are focused around replacing the coal fleet with new, efficient, clean burning gas-fired assets. The latest technologies from the original equipment manufacturers are significantly more efficient than the technologies of 10 years ago.

Intermittent energy generation – primarily wind – is also creating opportunities to invest in peaking gas-fired assets. Going forward, at least in the medium term, I think it’s safe to say that most of the power generation opportunities in the US are going to be either gas-fired or renewable.

Q What opportunities are you seeing outside the energy space?

SM: We focus on essential infrastructure assets, the same investment strategy that we have pursued in Europe for almost 14 years now. In that bucket, we include roads, airports, regulated assets and telecoms.

As Mark mentioned, the telecoms sector is a particularly exciting space right now. We see a significant need for investment to support build-up storeys around towers, where there is always the need for more spectrum. Again, you have the mega-players looking to buy up smaller players and then there are the independent companies trying to gain scale through aggregation.

Fibre networks are also being deployed through different types of contracts. You have PPP opportunities, where fibre is being deployed in cities. You also have private roll-out strategies, where a lot of capex is needed to increase networks.

Data centres provide a third category. There is huge demand for data storage as corporates increasingly look to outsource their data storage needs. We therefore expect to see a significant spate of investments in the data centre space.

“Sticking to essential infrastructure, which allows you to understand the downside protections, gives you a better sense of the opportunities”

Stefano Mion

Q You mentioned a focus on transport assets as well. What opportunities does North America present in that category?

SM: Transport is a major theme in the US market, which has been talked about for many years now but has continued to lag the Canadian market – and even the Mexican and Chilean markets – in terms of volume until recently. There are a number of PPP road projects that have taken place.

There is also increased interest in the airport space, with local authorities starting to recognise the potential for PPP as an economic opportunity. Airports are certainly a sector where we expect to see a lot more activity in the US in the years to come.

Q What particular challenges do you associate with investing in this market?

SM: Infrastructure is all about long-term investment. It’s about backing management teams in their need for growth and backing companies in search of capital investment. It’s about continuing to invest and update infrastructure to ensure it remains sustainable.

All of that means you need to take a long-term view and, as in every market, long-term views are becoming increasingly challenging due to rapid tech advances and other macro trends. But that is where sticking to essential infrastructure, which allows you to understand the downside protections, gives you a better sense of the opportunities that can provide the stable returns that we have promised to our LPs.

Q What about the political backdrop? Is that not a challenge?

MV: History shows that essential infrastructure assets perform well across different state and federal administrations. We don’t make decisions based on trying to predict political outcomes. Essential infrastructure is going to add value in any political climate.

Q The state vs federal political structure can also frustrate decision-making though, can’t it?

SM: Obviously, the fewer decision-makers you need in an investment process, the easier it is to arrive at your desired outcome. And if you do need to involve more decision -makers, it is easier if the chain is aligned in terms of policy. But that is true for every jurisdiction where we operate, not just the US.

Q How supportive is the domestic limited partner base?

SM: We have been talking to US limited partners for a number of years now as we have been raising capital for our European funds. We saw a major shift in appetite for infrastructure about five or six years ago. Before then, the majority of large US pension plans and insurance companies had very low allocations to real assets. And where they did have allocations to real assets, they tended to focus on real estate and timber.

When they started to invest in infrastructure, meanwhile, they primarily focused on energy opportunities. But now the trend is for institutional investors to expand their real asset allocations to fully embrace infrastructure. They recognise the downside protection – the stability – that that creates in their portfolios and they are looking for diversification.

The appetite for co-investments has also materially increased. This allows GPs like us to create a more direct relationship with our investors and support them in diversifying their portfolio.

Q What does the future hold for North American infrastructure and what are your ambitions for the market?

MV: I think that it’s a fantastic market to be investing in, given the number of opportunities we expect to see over the course of our current fund and its successors. There are tens of billions of dollars of investment opportunity out there. Given those opportunities, and all the appetite that we see from limited partners to participate in those opportunities, we are excited about what the future holds.

SM: Since we entered this market a few years ago, we have continued to apply the strategy we have developed in Europe over the past 14 years: backing management teams and companies in their growth strategies and their need for investment. That is already proving successful.

We see a lot of fund managers in this market looking for high IRRs over a short time period. The track record we have in supporting companies in their long-term growth is something which is proving to be a differentiating factor and we intend to keep on building on that.

Skyline: A renewables buy-and-build story

In 2018, Ardian partnered with Transatlantic Power Holdings to build a renewables platform based in the US.

Skyline Renewables focuses on the onshore wind sector. Its first acquisition was Whirlwind, a project based in Texas. Whirlwind was a wind farm comprising 26 turbines and with a total capacity of 60MW. The deal included the buyout of tax equity interests from JPMorgan and cash equity interests from RES Americas.

In September of last year, Skyline went on to acquire the 166MW farm Hackberry Wind Farm. The following month it acquired Starwood Energy’s 51 percent interest in the Horse Creek and Electra wind farms, both of which are 230MW projects. All three projects are also located in Texas.

In February, Skyline purchased a 117MW wind farm portfolio from NJR Clean Energy Ventures, the clean energy subsidiary of New Jersey Resources. The farms are located in Iowa, Kansas, Pennsylvania and Wyoming, and providing clean energy to major population centres across the US. The deal marked the first tax equity financing fully negotiated by Skyline and brought the company’s wind portfolio to 803MW of controlled capacity.

Ardian’s ambition is to build one of North America’s leading clean independent power platforms with total installed capacity of 3GW. It is now looking to develop and build its own projects, in addition to buying and operating existing assets. And although it continues to focus on wind as the cheapest way of generating electricity, it is also pursuing solar opportunities and monitoring the evolution of power storage.