Exclusive: Dalmore set to launch £500m third fund

The vehicle will differ from its predecessors in that it will adopt a term of 15 years rather than 25 while also expanding its investment horizon to the European continent.

UK fund manager Dalmore Capital is close to launching a third infrastructure fund with a £500 million ($603.6 million; €570 million) target, chief executive Michael Ryan told Infrastructure Investor.

The Dalmore Capital III fund, which is awaiting regulatory approval expected imminently, has a hard-cap of £750 million and is seeking a first close within the next few months of between £200 million and £300 million.

Dalmore hopes to complete the fundraising by the end of this year and is seeking a target IRR of 10 percent with management fees at the lower end of the spectrum, Ryan said. Similarly to its predecessors, the fund will be seeking to invest largely in PPPs and regulated assets in the UK, with room left for co-investment opportunities.

It is the first time, however, that Dalmore is allocating a maximum of 20 percent of the fund to be invested in Europe.

“Demand for Euro-denominated PPPs from European investors is high and returns can be lower than for UK transactions,” Ryan cautioned. “There is capacity to invest in Europe, and if we do deals in Europe it will be PPP transactions, if we think they offer good value. There are some countries in Europe where they've adopted the UK model to fund social infrastructure. It's all about the question of whether you're getting the right return for the risk.”

He added that Dalmore has been in discussions with all of its previous investors, which include local pension funds such as Strathclyde and West Midlands as well as British Airways Pensions and the Railways Pension Scheme. The firm has also received early interest from investors in Asia, Canada and Scandinavia as it seeks to close on a number of pipeline acquisitions.

Ryan said the vehicle will have a term of 15 years, in contrast to the two previous Dalmore Capital funds, which had terms of 25 years. He explained this allows it to bring in additional investors like fund of funds and institutions more used to private equity-style structures.

While Ryan said Brexit has had little to no impact on investments, last year’s vote slightly delayed the launch of the fund, as a previous German investor decided to re-assess its UK investment strategy before going ahead. There was also a small delay on the launch due to Dalmore’s involvement in the Quad Gas Group consortium, which bought the UK’s National Grid gas distribution network in December.

Formed in 2009, Dalmore Capital raised £248.6 million for its first fund in 2012 before managing a £534.4 million vehicle for the Pensions Infrastructure Platform in 2014. Its third fund was a £440 million single-asset structure designed to back its involvement in London’s £4.2 billion Thames Tideway Tunnel.