Infracapital: Covid-19 can catalyse greenfield growth

Infrastructure investment can be a key area of stimulus for flagging economies, says Andy Matthews, greenfield managing director at Infracapital.

This article is sponsored by Infracapital

Greenfield investing is all about fresh opportunities. How do you define greenfield infrastructure?

Andy Matthews

Greenfield means different things to different people – it could mean buying a hillside and thinking about building a wind farm on it, or it could mean funding the construction activity of a fully documented project at the more deliverable end of the spectrum. It is important that LPs understand where their risk balance lies. That helps them to understand how greenfield can fit within their balanced investment portfolios.

We are dedicated to building, rather than buying, core infrastructure. Our strategy is focused on building long-term, sustainable, core infrastructure that, once fully operational, will be deemed as essential assets. We look for predictability of revenues and monopolistic
or quasi-monopolistic positions and invest at the later-development and construction stages, where there is more certainty and visibility of deliverability.

What are the advantages of a greenfield strategy?

We concentrate on the premium returns that can be achieved by investing during the construction phase. By investing at the construction stage, once delivered, the strategy is able to benefit from a premium return for the same operating cashflows that would be received on a traditional brownfield investment. By investing early, the J-curve is not as deep and yield is higher than would be the case for a corresponding brownfield investment due to the lower entry price. Furthermore, there is the opportunity to capture a capital return from taking projects through construction, and significant yield if investors choose to hold the assets throughout the operating life.

The ability to deliver a premium return from building essential infrastructure in Europe is predicated, however, on accessing the opportunities early and having the specialist experience and expertise to manage construction.

How should greenfield investing be approached?

In the first instance, a key part of a greenfield strategy is the ability to access opportunities early and we focus on securing deals on a bilateral or less competed manner. We are very focused on building long-term relationships with developers and industrials. Our strategy is to create platforms, rather than a portfolio of individual companies, which is easier said than done. It involves building management teams, as well as building assets.

The platform strategy means we can create exclusive partnerships, through which we can take advantage of opportunities using the industrial or development partner’s expertise, alongside our delivery and financial expertise. That results in repeat business, a diverse strategy and the management structure required to exploit it. The alternative is to respond to a whole array of smaller PPP tenders, which won’t always create that repeat business model.

The second key pillar is the delivery of construction. We typically invest in the late-stage development phase, having the necessary greenfield experience to effectively manage construction risk. We try to find contracted cashflows, based on strong counterparties, where the asset has solid supply/demand dynamics, alongside assembling an experienced
team. That not only supports our investment thesis, in terms of delivering returns, but also gives counterparties and our partners faith in the deliverability of assets during the construction phase and, of course, ahead into the operational phase.

Which sectors and geographies are generating the most interesting opportunities?

Consumer demand and technological advancements are reshaping the nature of modern infrastructure. Driven by a surge in remote working, we have seen digital infrastructure become mission-essential.

We were one of the earliest investors in the fibre-to-the-home sector and support the greenfield delivery, which is a very complex component of fibre roll-out. It is not as easy as digging trenches and connecting homes. It is very much a procurement and delivery strategy, which doesn’t suit all funds in terms of the granularity of what we have to get involved in.

With continued focus on driving the green agenda, it is worth looking at the energy sector in its widest sense.

We have built renewable assets on a long-term partnership basis, where we have provided certainty of capital for our partners and have been able to flex the offering across sectors. As a case in point, we have been heavily involved in French rooftop solar. Equally, we also focus on grid support and standby power opportunities, in addition to energy efficiency.

Supporting a reduction in energy consumption is proving to be a very broad business area. We have an established relationship with Enel, launching a creative joint venture across Europe to provide industrial energy solutions. This joint venture has grown from a single country strategy to a multi-jurisdictional solution, helping not only to solve a business problem for Enel’s customers, but a societal problem as well.

How have greenfield strategies evolved in terms of deal structuring and risk mitigation?

Greenfield infrastructure is not without risk. However, construction and other risks will be known entities to a seasoned greenfield manager, and these are to be mitigated through measurable risk management techniques.

If you go back 10 years, greenfield infrastructure in the UK typically involved traditional renewable energy projects, or else public-private partnership projects, with full Energy Performance Certificate wraps. However, not every greenfield project can be approached in that way.

We are already seeing some of the large, offshore wind farms being approached on a multi-contract basis. People are starting to get more comfortable with that. And certainly, you cannot anticipate having a large EPC solution for fibre projects. It requires far more active management, in terms of looking for individual, smaller-scale projects, as you roll out.

An EPC solution is not everything. There are different ways to look at construction risk management and bring our experience to bear that allow us to control cost in a better way, as well as control delivery to the ultimate customer. If an EPC contract is viable, that is something we can, and have, done.

You must be open-minded, however. An asset may need to be fully equity funded in the early stages while you prove and deliver, before corporate finance solutions become available.

Over the course of my career, there has been a clear evolution towards a more dynamic approach to risk and reward rather than the formulaic approaches of the past.

What impact has a public backlash against PPP had on the segment, and what types of deals are emerging in its place?

Public discourse against PPP has been around for a long time but has really gathered momentum, providing a challenge to governments as to whether further private finance initiatives or PPP can take place.

If you are reliant on a government procurement methodology, that means you may be held hostage to that pipeline and the risks of projects getting pulled. We deliberately avoid a direct government procurement strategy and prefer to identify genuine need.

There is a significant need for new infrastructure across Europe and, as Europe comes out of covid-19, governments are encouraging infrastructure investment as a sector that can, hopefully, drive the economy out of recession.

Infrastructure projects can help bring support to some of the challenges facing society, from the green agenda to digitisation, and act as future engines of economic growth.

Although we avoid long and unpredictable government procurement processes, we do look at which sectors need capital and how we can respond to that on a private-to-private basis, using government policy as one of the central tenets to deliver it. For example, we might look at the landfill tax as a driver for the waste-to-energy market. That comes from policy-driven initiatives but not direct procurement.

Then there are subsidies, such as the £5 billion potential commitment to fund fibre-to-the-home in the 20 percent most rural districts of the UK. That will allow for far more flexible delivery models than a PPP would offer.

How has LP appetite for greenfield infrastructure changed?

Investor understanding is evolving. We are involved in a continuous process of education with LPs and this includes demonstrating how our expertise in this field can help investors achieve premium returns. Historically, investment has been focused on brownfield deals, but our aim is to demystify greenfield and to help investors understand what it entails.

What does the future hold for greenfield investment?

The future for this strategy is very exciting. The investment need for resource-efficient infrastructure every year according to the European Commission is nearly €180 billion if Europe is to achieve EU climate and energy targets by 2030. This is a growing market that is still largely untapped, with great opportunities, and covid-19 has helped bring a focus on the need to build better, more sustainable infrastructure for society.

Governments and industrial partners do not always have the balance sheet capabilities to take on all this investment themselves. As such, there is increasing need for the private sector to fill this funding gap.

This provides an opportunity to not only create attractive financial returns but to deliver environmental and social impact, and build solutions to 21st-century challenges.

What challenges does covid-19 present to a greenfield investor? Are there opportunities too?

One of the biggest challenges has involved supply chains, in terms of availability of resources. Several manufacturers across Europe have been closed down due to covid-19, which has created delays. Projects have further been impacted by difficulties in getting people on site, due to social distancing requirements.

With that said, the response, as lockdowns have been eased, has been great. There has been a real willingness to make up for those interruptions, with creative changes to working practices, new shift systems and seven-day working weeks.

Meanwhile, other sectors classed as essential services, have maintained the right to continue to operate – for example, telecoms. Small construction groups working in rural locations have been happy to continue to work. We have ensured that the appropriate conditions and health and safety protocols have been put in place, but there has been no major slowdown.

Equally, we are seeing different demand characteristics as a result of covid-19. There has been a huge increase in demand for fibre-to-the-home driven by an increase in remote working. However, if you had toll roads in your portfolio, you would probably have seen a significant reduction in demand as travel has been curtailed.

In general, though, I would certainly say that we are seeing a real enthusiasm for infrastructure investment because this is one area where the government can stimulate demand through policy, procurement or direct investment itself. That helps to strengthen the supply chain and grow the resource base. Across Europe, there is a real momentum behind the ideas of building back better and building back greener. Corporates are being encouraged to reduce their carbon footprint, and so are looking for capex-light lease models, where their balance sheets may not be strong enough to invest in the assets themselves.

The same is true of the speed of connectivity, which is a major push for most governments. We are seeing many opportunities in Poland at the moment, as well as in Germany and, of course, the UK. These are some of the interesting drivers that are coming out of covid-19. They are helping to make the investment agenda more attractive and are adding exciting opportunities to our investment pipeline.