Getting out while the going’s good (weekly2)

Lots of bidders, plentiful finance, soaring multiples. It can only mean one thing: the seller’s market is here.

The sale by Morgan Stanley Infrastructure (MSI) of US pipeline owner and operator Southern Star earlier this week was the latest indication that we are in a seller’s market. After all, this was no isolated move for MSI: since the beginning of the year, it has bid farewell to no fewer than four of its former portfolio assets. 

With a surfeit of debt from both banking and capital markets sources – plus an ever-growing crowd of fund managers, direct investors and sovereign wealth funds all jostling for possible acquisitions – market conditions have rarely appeared more promising for those seeking to court buyers. 

As one advisory source told us: “If your asset is big enough to warrant hiring an investment bank which will make the asset widely available, then the chances are a very strong bid will come in.” That bid may be a so-called “left field” bid, inspired by at least one party having a perceived special angle on the deal or being prepared to factor in aggressive growth assumptions. 

One transaction that caught the eye earlier this year was the $5.7 billion sale of a 66-year lease of the Indiana Toll Road to Australia’s IFM Investors. IFM pointed to economic rebound in the US as a compelling reason for the deal it struck and also highlighted its use of conservative gearing. But unconfirmed reports that the second-highest bid was around $500 million lower than IFM’s (and the third-highest $1 billion lower) hinted at the presence of another symptom of a seller’s market: surprisingly wide margins between highest bids and under-bids. 

Our advisory source said that the Indiana auction is far from alone – such scenarios are, in fact, becoming increasingly typical. Summing up the happy situation sellers find themselves in today, he reflected: “I can’t say it won’t ever get better than this, but…” before tailing off without finishing the sentence. 

Another recent conversation we had was with a representative of a closed-end fund manager who put forward the argument that current conditions give the lie to those who claim that infrastructure should be all about long-term holds (and the creation of long-term or open-ended structures to accommodate this).

But while a rigid long-term view would almost certainly be counterproductive, it would be misleading to assume that long-term investors will not make exceptions where they can see the opportunity to score an open goal. As Raphael Arndt, the current chief investment officer and former head of infrastructure at Australia’s Future Fund, put it in a speech last year: 

“For us, being a long-term investor means having the ability to look over the horizon and think about the issues which could impact asset values in the future. It does not however mean that we necessarily buy and hold investments for very long periods. After all, the long run is just made up of a series of short runs. If your asset is over-valued in the current market why not sell it and buy it back later if valuations fall?”