A test of endurance

The smile says it all. Asked how tough it was negotiating and completing the spinout of London-based Arcus Infrastructure Partners from its ailing parent company Babcock & Brown, Arcus senior partner Simon Gray smiles, pauses and then replies: “When we embarked upon it, we knew it would be difficult because of the prevailing financial climate. But, to be honest, it was even more difficult than we had feared.”

The process began in November 2008, by which time it was apparent that Babcock & Brown, the Sydney-based investment and advisory group, was in deep trouble. For the management team of Babcock & Brown’s European infrastructure business, which was headed by Gray and Toto Lo Bianco, and which a year previously had closed its first fund on €2.2 billion, pressure was building. 

Gray, who had joined the European advisory team of Babcock & Brown back in 1996, reflects: “It was increasingly apparent that things at Babcock & Brown were heading in the wrong direction. Investors were rightly nervous about the situation. Would the team remain intact and maintain its focus? Could the fund ultimately be left without a manager? We had spent a lot of time and energy developing and marketing the fund, sitting with investors. It just didn’t seem right to walk away. So we decided to put together a management buyout proposal.”

Wise move

At the time, perhaps, Gray did not appreciate the full implications of that decision. Ultimately, the buyout was delivered when Arcus emerged as an independent entity in July 2009. It was, in retrospect, a wise move – Babcock & Brown went into liquidation just one month after the birth of Arcus. But to imagine that it was a seamless and pain-free process would, Gray makes clear, be very wide of the mark.

He admits that there were times when he thought the exercise might be doomed to failure. “Was I confident every day? I’d be lying if I said that. There were dark days, but there was a collective faith within the team in what the future held. We had strength in numbers. Luckily, we didn’t all have our dark days at the same time.”

There were dark days, but there was a collective faith within the team in what the future held . . . luckily we didn't all have our dark days at the same time

Simon Gray

Asked to identify the biggest challenge, Gray thinks for a while and then offers one word: coordination. “We needed five or six different things to happen at the same time and, in the first quarter of 2009, that was not easy. Everything needed to happen in a consistent manner and timeframe. It was extraordinarily difficult dealing with everyone – you had Babcock & Brown management, the [Babcock & Brown] creditors, their advisers, the fund’s limited partners, portfolio company management teams, co-investors and lenders to portfolio companies, regulators. Every day a new party came to light that somehow had a role to play.”

On top of this, there was a team of around 40 professionals to keep happy and persuade that all the pain would be worth it in the end. “We had a great team of people; we’d worked together over many years and we had a strong bond and collective commitment,” says Gray. “But that commitment was sorely tested.”

New chapter

It’s nearly a year now since independence day. How are Arcus’ prospects viewed by the market? A limited partner canvassed by Infrastructure Investor expressed enthusiasm: “Arcus offered an independent management model with strong alignment and backed by a good team – an approach that we were happy to support,” said Richard Moon, an investment manager at the UK’s Railway Pension Investments.
Another leading investor in infrastructure funds, based in Europe, was a little more cautious: “For some investors, I’d guess that it’ll take quite some work to undo the bad will that Babcock may have caused previously. On the other hand, Simon is one of the most intelligent/cerebral and determined investors I’ve met and they do have a track record.”   

So has the intervening period since the buyout provided some respite for Gray and colleagues? He chooses this moment to take a brief stroll and pour a coffee before resuming his seat – perhaps gathering his thoughts before commencing a new chapter in the story. “What we realised, after the buyout, was how much you take shared services for granted – things like legal, compliance, human resources, office management,  IT etc. From July last year, we had to create the internal infrastructure for ourselves from scratch – the processes and systems, governance, reporting etc.”

In other words, there was no let-up once independence was achieved. There were many housekeeping issues to attend to. One of these was the recent migration of the general partnership from Guernsey to the UK and appointment of JPMorgan as fund administrator. “The original choice of Guernsey was driven by Babcock & Brown’s tax planning,” says Gray. “For Arcus Guernsey made less sense, and it was burdensome and time-consuming to maintain.” Asked whether locating to the UK made him worried about taxation, he shoots back: “These days, everyone everywhere should be worried about taxation!”

Given all the many other distractions, Arcus has done well not to take its eye off the ball when it comes to new investment opportunities. In July last year the firm finally acquired a 14.1 percent stake in Euroports, a continental European dry bulk port operator. The deal resulted from 12 months of discussions with majority owner Prime Infrastructure, the business formed from the Brookfield-led recapitalisation of the former Babcock & Brown Infrastructure group. “We felt the business needed a hands-on approach that couldn’t be done effectively from 12,000 miles away,” says Gray. “Eventually, they said they would welcome a new investor.” Antin Infrastructure Partners, the Paris-based infrastructure fund, also holds a minority stake in the firm.

We've had to stay on top of the underlying capital structures because of the stresses and strains brought about by the general market environment over the last 18 months

Simon Gray

Given Arcus’ apparent specialisation in complex scenarios, it is perhaps unsurprising that not only did the negotiations to acquire a stake in Euroports take a long time – but also that the business itself is a tough operational challenge. It was formed from a grouping of six original businesses and has over 20 port terminals in seven continental European countries handling over 50 different product types. Gray believes the business is attractive because its operations are based “on key trade corridors” and, because of its diverse mix of bulk products, “you have a strong level of income diversity providing a high level of stability and protection”.

Rejected bids

In all, Arcus has six companies in its portfolio – all investments made since the fund now known as Arcus European Infrastructure Fund I closed in November 2007. Among the collection is another ports business, the UK’s Forth Ports, in which Arcus has a 23.5 percent stake. Alongside UK property company Peel Holdings and fellow infrastructure investor RREEF Infrastructure, Arcus has made three bids to acquire the whole of Forth Ports which have all been rejected by the target as alleged under-valuations. The most recent of these was a 1,400 pence per share offer on 27 April this year. Bound by regulations relating to Forth Ports’ listing on the London Stock Exchange, Gray is unable to comment on developments.

Of the four remaining portfolio companies, two are train rolling stock businesses. They are at more or less opposite ends of the spectrum in terms of risk/reward, says Gray. Angel Trains, the UK’s largest rolling stock company which is currently seeking to refinance some of its acquisition debt in the bond markets, is, according to Gray, “very robust, predictable, stable and regulated”. Alpha Trains, which leases rolling stock to the continental European market is, on the other hand, “very market-driven, with much less government underpinning”.

Completing the portfolio are Brisa, a Euronext-listed toll road operator which owns and operates six road concessions in Portugal, one in Brazil and one in the US; and Shere Group, an owner of wireless transmission sites in the UK. Gray says the return target for the fund is consistent with many other funds of that vintage. “The investments have been performing well at the operating level, even during the last 18 months of turbulence, and that gives us confidence that the fund will meet its return targets,” says Gray. “But we’ve had to stay on top of the underlying capital structures because of the stresses and strains brought about by the general market environment over the last 18 months.”

Gray is encouraged by an improving environment for doing deals. “The opportunity set is increasing, there’s a good pipeline and flow of opportunities – even in sectors and geographies where it’s been slow up to now, such as continental European energy.” He cautions, however, that greater regulatory scrutiny may have a negative effect on infrastructure deal economics going forward as the perception grows that governments and regulators may have been too generous to investors and not generous enough to consumers. He points to such things as tougher settlements by utility regulators and less generous tariffs for renewable energy firms as evidence of this.


With €700 million still to invest from the current fund – just less than one-third of the original total – Gray concedes that the firm “is looking at the fundraising market with interest”. He says he has been a keen observer as the debate has raged about appropriate models and economics for infrastructure funds, with high-profile figures like Robbert Coomans of ABP challenging the asset class to devise appropriate structures. “There’s a widespread sense that current structures are not quite right and, therefore, there is change afoot. But I don’t think there is universal agreement on what the model needs to look like – though there are some interesting models and themes emerging.”   

With a glint in his eye, Gray refers back to the keynote interview with Chris Beale of Alinda Capital Partners in the April 2010 issue of Infrastructure Investor and says he endorses Beale’s view that independence scores highly when limited partners are assessing fund managers. From recent conversations with LPs, there’s nothing to suggest that view is wrong. Which is just as well, because Gray and team didn’t put themselves through all those anxious days and sleepless nights for nothing.

As he rises from his seat, Gray is asked how he spends his spare time. Sailing around the Isle of Wight, a small island off the south coast of England, is, it transpires, a favoured – and neglected – pursuit. He is relishing the prospect of just maybe having the time to indulge in a little more of it.