Jumping on the bandwagon(2)

Deal announcements are like buses. Time can pass without a single one and then a bunch of them come all at once.

Lately, many of these proverbial buses have actually arrived on rail tracks. In the space of a few months, no less than five train leasing deals: the US’ Kohlberg Kravis Roberts invested in Austrian/German business European Locomotive Leasing in a €200 million deal in March, followed by Dutch-based DIF and Hamburg’s Paribus Capital, which teamed up on a €140 million rolling stock project with the German state of Schleswig-Holstein last April.

But it’s only this month that the trend gathered serious momentum. London-based Pamplona Capital first acquired the UK’s Beacon Rail from a subsidiary of Japan’s Mitsubishi UFJ in a $450 million deal, before Australia’s AMP Capital upped its stake in Luxembourg’s Alpha Trains from 15 percent to 20.9 percent. And then this week Californian firm Oaktree Capital Management bought Munich-based Railpool from a couple of German banks.

The industry can count on powerful growth engines. For one, the liberalisation of the rail sector is bringing a fresh array of private operators to the market. Those are most often eager to keep their balance sheets light on assets and focus on their core business; they would rather lease trains than own them.

There’s also a strong political impetus, across Europe, for putting more freight on trains – a means of transport seen as more economical and environmentally-friendly. A number of ‘train corridors’ have been electrified across the continent to cope with additional traffic, and there’s now pressure to put these ambitions in motion. And that starts with putting more trains in service.

Yet faced with such opportunities to upscale, many leasing businesses lack capital. As a fund manager told us, a good number of them have so far been under the ownership of banks, which he says “have essentially been starving leasing companies of capital”. It’s thus good news that lenders are now selling out, he argues, because their new acquirers have a lot of capital to invest.

This tells us much about where competitive pressure within core infrastructure is being redirected. Faced with a relative scarcity of long-duration, income-generating assets, many fund managers are now looking at opportunities on the ‘fringe’ of infrastructure. As stable, cash-yielding businesses offering inflation protection, train leasing companies are now considered by many to be infrastructure assets – a categorisation that would have likely been more debatable less than a decade ago. Other former grey areas, such as parking spaces or district heating, are now accepted as part of the asset class, as exemplified by the €1.96 billion acquisition of Vinci Park by Ardian and Credit Agricole last February.

The rolling stock sector has its pitfalls. Some leasing businesses are saddled with debt, while others are still in need of a technological upgrade (starting by switching from diesel locomotives to electric ones). A new directive that requires trains to abide by European-wide specifications also renders part of the existing fleet largely obsolete. And like most assets on the borderline of infrastructure, they are generally more operational in nature – so they require a good deal of active management.

Yet the trend is likely to continue. A number of investors we polled on the subject reckon valuations would increase in the coming months. Also this month, the owners of the UK’s Porterbrook announced that they were considering an exit from the rolling stock leasing business – a possible auction that’s already attracting a fair amount of attention. Fund managers would be well advised to stay on the line.