GCP launches Gulf infrastructure debt fund

The UK firm, which will run the $250m vehicle alongside emerging market lender Exotix, expects the capital to be fully deployed within four to six months.

Gravis Capital Partners, a London-based fund manager, has launched a new infrastructure debt fund focused on utility-scale infrastructure projects in the Gulf.

The vehicle will be managed in partnership with Dubai-based bank Exotix, which will be responsible for identifying and originating investments. The fund has a $250 million target.

It will seek to replicate the strategy followed by GCP’s existing funds, which aimed at allowing UK infrastructure developers to free up capital by providing refinancing solutions post-construction phase.

Upon completion of the investment phase, the fund will target a return of 6-7 percentage points over Libor (London Interbank Offered Rate), and aims for an annualised dividend yield of 5 percent for its first financial period to 31 December 2014.

Stephen Ellis, a partner at GCP, told Infrastructure Investor that big power and water projects abounded in the region, and that it was still possible to raise enough financing from institutional and commercial lenders to build them.

The sheer size and complexity of these assets, however, meant that developers were forced to inject a significant proportion of equity to bring them through the construction phase; yet the retreat of European, long-term lenders since the financial crisis offered little possibility to refinance them.

“You have enough political support for these projects to get them built, but once you are through the construction phase, there’s nowhere to go to refinance what is essentially a de-risked project.”

The fund will seek to plug this gap. By providing subordinated, long-term debt to contractors, Ellis explained, it will allow them to re-allocate equity to more lucrative uses. Meanwhile, the debt will be secured against the 25-year, government-backed cash flows generated by the projects.

“We’re focusing on the six credit-worthy states of the GCC region – Saudi Arabia, UAE, Qatar, Bahrain, Kuwait and Oman – which are immensely rich and where there is strong explicit support for these major power and water cooling projects. Sovereign backing for the long-term cash flow they generate is therefore available and dependable.”

In addition, Ellis noted, the preponderance of European banks in the region meant that the bodies of laws governing infrastructure contracts were very familiar to the firm – as they were most often based on English or French law. That would likely allow GCP to apply its experience in dealing with UK-based Private Finance Initiative (PFI) projects, he said.

The fund has already agreed to terms for seven projects, worth an aggregate $350 million, in Saudi Arabia, Oman, Abu Dhabi and Bahrain. GCP expects the vehicle to be fully deployed within the next four to six months, after which it could return to the market to raise more money.

The firm is currently running a twin-track road show, assisted by a book runner in London and two placement agents based in Dubai. Now at the end of its third week, it is expected to be completed by December 6.