One often wonders whether it's better to attend conferences during booms or busts. Our Infrastructure Investor Forum in Berlin earlier this week was a solid argument for the latter.
The more than 200 delegates gathered at the event spoke honestly about the problems they're facing during the downturn and voiced frustration at the lack of good solutions. The result was a degree of audience participation, brainstorming and probing debate rarely seen on the conference circuit.
For those of you unable to make it, here are the top ten take-away from the event.
1. There is growing consensus among infrastructure investment professionals that the asset class has reached a new stage in its development: one in which owners of infrastructure assets must derive their returns not from financial engineering but making operational improvements to their assets. In Berlin, CVC Capital Partners' head of infrastructure Stephen Vineburg was among those making this point very forcefully.
2. An almost shocking comment to hear from GPs who are learning to live with the world's new scarcity of debt: the lack of leverage is actually a good thing for the asset class. Many believe that infrastructure has been overleveraged in the past, and the current absence of liquidity will teach infrastructure investors to be more conservative in financing assets. It will also teach them to focus more on the operations side of the business.
3. Banks are seeking to get more pension investors involved in filling the gap left by their diminished underwriting capacity. Several banks confessed to having approached large pension investors about investing directly in tranches of debt – an idea that may get more traction as more pensions think about making investments directly rather than as investors in a traditional fund structure.
4. If any party in a syndicate of several banks doesn't get what it wants and drops out, the deal is more likely than ever to fall apart. The marginal bank on the deal is “the guy who completes the puzzle” and has more leverage than ever (absolutely no pun intended). Solution: borrowers should keep the dialogue as open as possible, advised James Miller, head of Secured Debt Markets at RBS Global Banking and Markets in London.
5. In trying to secure bank financing for a deal, it is a good idea to bring in a workout consultant before the transaction closes. This will make the lending parties feel more comfortable about inking the deal. It's a strategy that has worked well for First Reserve, Tom Sikorski, a managing director at the firm, told delegates.
6. Sponsors continue to consider all-equity financings in the current market. One delegate commented in front of the whole conference that, at below 35 percent to 40 percent debt financing, his IRRs are more attractive on an all-equity basis, given the current cost of debt. Jim Wilmott of Morgan Stanley shared with the audience that when his firm clinched the $1.16 billion Chicago parking meters deal last December, it could not find an attractive enough financing package and decided that going all equity for the asset made sense.
7. The fundraising cycle is going to be much longer than it has been in recent years. Chief reason: investors used to want to want to be the first ones to commit to infrastructure funds but now their preference has shifted to being additional investors after a fund has reached first close, according to placement agents present at the conference.
8. Investors are well-aware that they have more power in negotiating fees and they intend to use it in this difficult fundraising environment. Talk of lower fees, reduced catch-ups and other more LP-friendly fund terms and conditions dominated the end-investor panels at the Forum.
9. All the talk of infrastructure stimulus by governments worldwide is welcoming, but few investors believe it will have a significant impact on the way they do business. The consensus is that the impact is more psychological and feel-good than anything tangible.
10. The traditional greenfield-brownfield distinction is blurring with respect to geographic breakdown. Emerging markets-focused investors such as Actis said that they are beginning to see attractive brownfield assets up for sale in their core geographies; OECD and other developed-market investors on the other hand are beginning to note more attractive greenfield opportunities in their countries. An exception to this trend: India. “India has no infrastructure – it has to be built,” Krishna Kumar of IL&FS Investment Management reminded delegates.
One final take-away for those enjoying Berlin for the first time: Paulaner is a much better beer than Berliner Pilsner can ever hope to be. The German capital is a great city, but when it comes to brewing, Munich absolutely has the upper hand.