Q: RBS International has been active in the infrastructure market, across several sectors and geographies, for many years now. How have you seen it evolve?
IS: For a number of years the UK and Western European infrastructure market has been characterised by growing institutional allocations to the sector, leading to enhanced competition for assets and rising asset valuations. Add in a backdrop of continued macroeconomic uncertainty in the UK, US and continental Europe, and it certainly provides some challenges to infrastructure investors looking for resilient yield.
In this dynamic market, we’re seeing fund managers continually looking to expand and diversify their portfolios, seeking value-accretive investments in new sub-sectors and geographies – increasingly with cashflow profiles that differ from those characterised by traditional PFI. We’ve also seen an increase in the use of joint ventures between players in the market, which has helped support bids for some of the larger projects which have recently come to market.
JM: Another trend we’ve seen more recently is an increase in scrutiny on fund managers around the spending of public money for social services – such as schools, hospitals and prisons – and market expectations for complete transparency. The Base Erosion Profit Shifting regulation is a great example of this and we are seeing increasing numbers of funds currently considering simplifying their fund structures and consolidating their jurisdictional footprint.
Finally, we’d highlight European renewables as continuing to offer an attractive sector for investment as infrastructure funds have looked to broaden their geographical reach, underpinned by strong regional and global drivers such as the Juncker Plan, the Kyoto Protocol and the Paris Agreement.
Q: You mentioned increased competition for assets and that’s certainly evident in parts of the market, particularly in core infrastructure. How is that growing competition affecting the financing needs of the market?
IS: Competition has increased interest in fund financing solutions, for example, which provide vendors with ‘certainty of funds’ confidence in the execution capabilities of the bidding fund. We’ve also increasingly seen a need for bespoke financing solutions as our customers have had to adapt to the changes in market dynamics.
Be it the need for financing of the manager itself in order to take advantage of more value-add opportunities, such as M&A, or the need for a bespoke structure to support a specific financing need, banks are constantly needing to adapt their offering. We’re also seeing our financings increasingly used to bridge equity-only acquisitions, which subsequently are repaid after successful completion of a project financing.
JM: Our approach has also become more international. Given the limited primary dealflow in the UK, both listed and unlisted managers are considering assets further afield, most commonly in the G7 countries, the Republic of Ireland, the Nordics and Southern Europe.
As a relationship bank, we are proud to have been a supporter of the sector throughout the economic cycle, as indeed our customers have supported us over the last decade. As a result, we have played a lead financing role in a significant number of IPOs, in addition to providing bespoke bridging solutions and finance for both acquisitions and MBOs. We also work closely with our renewables project finance team at RBS to provide joined up solutions for managers with financing needs for both the SPV and the fund.
We believe that institutional investors will continue to reallocate to the alternatives space over the next decade, striving for enhanced yield and transitioning towards double-digit allocations
Q: Institutional investors are now significant players in the market, across debt and equity. What’s your view on their increased role and in what ways have they affected the way RBS International operates?
IS: We’re seeing institutional investors play a number of important roles in the infrastructure market, as sovereign wealth and pension funds continue to rebalance allocations away from purely bond and equity investments. Firstly, we’ve noticed an increase in direct equity investment from institutional investors, as they build in-house experience and look to streamline their cost of investment in the sector. This has exacerbated the competition for assets, however we believe the sheer economic requirement for privately funded infrastructure projects will ensure there is a sufficient pipeline of opportunities in the medium term.
We’ve also seen institutional investors play an important role in the infrastructure debt market, increasingly providing long term financing of infrastructure assets as they seek access to long term RPI-linked cashflows to match their liability base. Our project finance team have developed strong relationships with these investors, and we have really strengthened our advisory capability in the bond and private placement space to ensure that our fund clients are able to gain access to these pools of long-term financing they require.
In the fund finance space, we operate alongside institutional investors, providing shorter-term acquisition facilities to clients with existing long-term institutional debt. This collegiate approach provides fund managers with acquisition firepower that can be deployed quickly, which is then commonly termed out into longer tenor debt. This has proven to be an effective solution for clients who can tap into this connectivity to access funding with terms and tenors that suit their specific needs.
JM: We believe that institutional investors will continue to reallocate to the alternatives space over the next decade, striving for enhanced yield and transitioning towards double-digit allocations. This indicates the vital role that institutional investors will play in providing the private capital and expertise required to deliver essential European infrastructure.
Q: Finally, the UK’s exit from the European Union is still shrouded in considerable uncertainty, forcing players across the financial universe to prepare for a range of scenarios. What are your clients asking of you and how are you preparing for its consequences?
JM: On the client side, we’ve received a large number of enquiries about our Luxembourg offering, given the country’s Euro denomination and membership of the European Union. This provides fund managers with optionality amid a backdrop of political change whilst questions remain over the UK’s future relationship with the EU.
IS: Managers will decide where is the best location to form their funds, but with a geographical footprint across Jersey, Guernsey and now Luxembourg and London, we are confident that we will be able to continue to cater for our clients’ needs post Brexit.