M&A: Different GPs and fund structures can benefit assets

Louisa Yeoman of Astrid Advisors examines assets' ownership journey as they change hands from one financial sponsor to another.

Louisa Yeoman
Louisa Yeoman

Infrastructure is always evolving and its progress can be seen most clearly in the emergence of new sub-sectors and strategy differentiation. Look closer, however, and another facet of its progress is revealed in the ownership journey that assets are undertaking as they change hands from one financial sponsor to another.

Although some LPs argue that assets should have long-term owners rather than be subject to the M&A merry-go-round, we see a number of positives in these moves – not least the opportunities they provide investors to consider at which point they want to join a de-risking cycle, depending on their appetite for growth versus yield.

Having spent many years pitching on behalf of, and alongside, different managers, we quite rightly hear ‘why you?’ from LPs all the time. In our experience, assets that have changed ownership have in fact been strengthened by these moves, thanks to the diverse skill sets and fund structures that are required at different times of an asset’s life.

Different approaches all have the opportunity to create value, but each offers a different risk/return profile. Some of the key strategies are:

Carve-outs from strategics or corporates A strategy straight out of the private equity buyout textbook and an opportunity to identify an undervalued or non-core business unit

Emerging subsectors Utilisation of sector expertise and industry knowledge to identify early the value proposition and to mitigate risk better than the competition

Active asset management Control of ownership to drive growth and business transformation; from secondments to changing management teams and bolt-on acquisitions, the PE-style infrastructure manager has the toolkit to be a force for change
Long-term stewardship Optimising yield, managing political and regulatory risk, adopting appropriate financing structures and portfolio construction are all part of the skill set of the longer-term holder

A good example of an asset that is benefiting from this ‘value creation’ on its journey is Adven, a district heating business in Finland, which is now under its third generation of infrastructure fund ownership. It is also an interesting example of the expansion of the asset class as it accepts newer forms of infrastructure into the mainstream.

“While the transaction costs involved in such M&A activity are not insignificant, the influences on an asset in the hands of managers with different strengths cannot be ignored”

From its inception, carved out of a corporate (Fortum) by EQT in 2012, Adven would probably not have been considered a traditional infrastructure asset. EQT and its investors embraced this challenge, investing years of industrial experience and applying a transformational PE approach in the business and management team to significantly grow and de-risk Adven and thereby make it ready for its next chapter. Value was created and, importantly, alpha was realised through an exit, and the GP and LPs were aligned in their returns.

We witnessed at first-hand Adven’s second act in 2016 when it was acquired by AMP Capital and Infracapital. It was viewed as a high-quality infrastructure asset with a strong customer base and resilient cashflows, as well as a platform for growth and value creation through active asset management.

From strengthening the management team, expanding into new markets and significant growth through the bolt-on acquisition of E.ON’s district heating business, Adven thrived under another four-year ownership period and created value for GPs and LPs alike.

Today, Adven is considered a highly attractive and essential infrastructure business and a leading provider of outsourced clean energy in the Nordics. It now sits – perhaps appropriately, given its de-risked profile – in the hands of longer-term holder JPMorgan Asset Management and its open-end fund structure.

Adven’s future is no doubt one of long-term sustainable growth, if not quite at the rate of the first two chapters. There is a different set of opportunities for investors, given the scale the business now commands and its position driving change in the energy sector.
The Adven success story is no fluke and it is not the only asset to have changed hands before evolving and maturing.

Coriance, a French district heating business, was owned by Italian utility A2A, then acquired by KKR in 2012, then sold again to First State in 2016. Earlier this year, Antin sold Kellas Midstream to long-term holders GIC and BlackRock, after originally carving out the business by acquiring a 63 percent stake in CATS from BG (now Shell) in 2014 and later acquiring a 36 percent stake from BP in 2015.

The transaction costs involved in such M&A activity are not insignificant, and the pockets of GPs weigh heavy with realised carry. However, the influences over an asset in the hands of managers with different strengths cannot be ignored.

Ultimately the balance of capital growth versus yield lies in the hands of the investor as it considers which manager to partner with and at which point it wants to join a de-risking journey.

Louisa Yeoman is a co-founder of Astrid Advisors and has worked in capital raising and investment management for almost two decades. She was previously co-head of European distribution for AMP Capital