ICG bets on public transport growth with Kinetic bus deal

MD Tom Laidlaw says the regional bus operator had withstood the pandemic well, as the manager gears up to raise around A$200m for future deals.

Australian fund manager Infrastructure Capital Group has closed its acquisition of a 49 percent stake in regional bus operator Kinetic, alongside Canadian pension OPTrust. The deal come as ICG is preparing to return to market to raise further funds for its open-end Diversified Infrastructure Trust.

ICG’s investment, which will see the firm manage a stake of just under 50 percent in Kinetic, was led by the DIT fund, and supported by investors in that vehicle through additional co-investments. OPTrust has acquired just over 50 percent, with Kinetic’s management retaining a stake of around 1 percent.

ICG managing director Tom Laidlaw told Infrastructure Investor that DIT was now A$800 million ($588.7 million; €509.6 million) in size following the Kinetic deal, and that the firm would seek to raise around A$200 million more for the vehicle. As an open-end fund, though, there has been no specific target set.

The value of the Kinetic deal was not disclosed but Infrastructure Investor understands that it came with an enterprise value of more than A$1 billion, with the equity investment from ICG and OPTrust in the region of A$500 million.

ICG declined to comment on the value of the deal.

Betting on growth

Kinetic operates more than 147 bus services across 15 cities in Australia and New Zealand, with a fleet of more than 3,000 buses operating from a network of 56 depots. It provides long-term contracted bus services across urban and regional routes, general commercial services and airport bus services, with all but the latter tending to operate via availability-based contracts.

The firm was this month awarded a nine-and-a-half-year contract worth A$2.2 billion to operate a major bus franchise in Melbourne, covering 30 percent of that city’s bus network.

Laidlaw said that Kinetic’s business had proven itself to be “robust” during the pandemic, after it had diversified its operations in recent years such that its SkyBus airport service now comprises only 10 percent of the company’s revenues.

“Public transport volumes have continued to increase, and our expectation is this trend will continue. We think that as cities expand, it is very rare where a government has planned heavy or light rail in advance, so buses are generally the cheapest and easiest way for them to move large volumes of people from one place to another,” he said.

“None of us quite know what the new world will bring in terms of working from home or working in the CBD [central business district], but to the extent that there is any shift to suburbs or regions where there are not always heavy rail lines, buses will be the logical public transport option.”

Laidlaw said ICG and its partners view Kinetic as having strong potential for both organic and inorganic growth, with the latter supported by the fragmentation of bus operators in ANZ.

“There are probably only half a dozen or so big operators here, with literally hundreds of smaller operators. As the world moves towards bigger and better credentialed counterparties, there will be opportunities for consolidation,” he said.

This would also be supported by the trend towards electrification of bus fleets, with larger operators more able to fund installation of charging infrastructure at depots than smaller players.

“You have to install some reasonably expensive charging equipment at your depots, so we think the move towards electric buses over the next 10-20 years is more likely to benefit larger operators. If you don’t have critical mass, you might not be able to promise electrification,” Laidlaw said.

Kinetic is aiming to build the largest electric bus fleet in the region, and currently has nine electric buses in operation in New Zealand with 25 more on the way. It plans to add more than 35 electric buses to its fleet in Australia in the next 12 months, with a target of having more than 50 percent of its fleet electrified by 2030.

The firm has also set ambitious ESG targets, including having 50 percent female drivers across its fleet by 2030.

A busy year

The Kinetic deal is the latest move in a busy period for ICG. In October 2020 it entered a partnership with French energy giant Engie and Japanese trading house Mitsui to acquire a 75 percent interest in the Australian Renewable Energy Trust, a business spun out of a pre-existing Engie-Mitsui joint venture.

Earlier this year, it made an indicative bid for superannuation fund Rest’s 50 percent stake in gas pipeline owner SEA Gas. And last year it acquired district energy business Enwave from Brookfield Infrastructure Partners, as well as joining with Pacific Equity Partners and Canadian pension OMERS to acquire ASX-listed Zenith Energy.

ICG is also linked with the launch of fund of funds manager TRUE Infrastructure, which was launched in 2020 by Hastings Funds Management founder Mike Fitzpatrick and has deployed the majority of its initial capital in ICG vehicles.