To say there is a lot riding on the success of the Marguerite fund would be an understatement.
Designed as a key part of the European Union’s (EU) response to the financial crisis, the fund has to not only help further the EU’s infrastructure policy objectives, by committing equity to mostly greenfield investments in the energy and transportation sectors – it’s also expected to be successful enough to spawn similar vehicles which will continue its work.
For that to happen, it has to show investors that furthering the EU’s infrastructure policy objectives does not mean it will invest in every single project Brussels would like it to, but that it is an independent entity that will deploy capital according to market principles, with a view to providing a good return to its limited partners.
Nicolas Merigo – chief executive of Marguerite Adviser, the firm that runs the fund’s day-to-day activities and is responsible for originating and executing deals – seems well aware of these expectations as he sits down at Infrastructure Investor’s London offices. He is accompanied by colleagues William Pierson, managing director for energy, and David Harrison, chief financial officer.
He is quick to address concerns about Marguerite’s independence before proceeding further:
“Yes, the fund has specific target returns and an independent investment committee, so it will be able to decline investment opportunities that do not meet risk-return requirements, even if such projects may fulfil policy objectives,” he says.
Countering the crisis
The question of how Marguerite will function has been on the minds of infrastructure investment professionals everywhere since news about the fund started surfacing in September 2008.
Initiated at the beginning of the global financial crisis, the Marguerite fund was launched under the aegis of the European Council as a key measure of the European Economic Recovery Plan.
At its heart are six core sponsors – the European Investment Bank (EIB), France’s Caisse des Dépôts et Consignations (CDC), Italy’s Cassa Depositi e Prestiti, Germany’s KfW bank, Spain’s Instituto de Crédito Oficial (ICO) and Poland’s PKO Bank Polski – all with strong infrastructure backgrounds.
Sensing the financial crisis might create not just a debt gap but also a shortage of equity, especially for greenfields, the six state-backed institutions designed the fund to make sure the EU’s transport and energy plans have a chance of remaining on track.
To guarantee Marguerite got off to a strong start, each of them contributed €100 million to the fund, ensuring that it had €600 million in seed commitments when it officially launched in December 2009. Three other institutions – including the European Commission (EC) – joined the core sponsors four months later for the fund’s €710 million first close.
That put Marguerite in the enviable position of raising almost half of its €1.5 billion target in a very short period of time – testament to its EU underpinning. But that strong institutional background could also be seen as a double-edged sword.
The decision-making process at Marguerite’s spiritual predecessor – the €250 million Galaxy infrastructure fund, which was established in 2001 and now in the process of being sold – was reportedly slow and fraught with conflict between the different parties involved in it.
Given that Galaxy’s shareholders – CDC, CDP, the EIB, KfW and the EC – are five of the nine investors that have to date committed capital to Marguerite, what guarantees does Merigo have that history won’t repeat itself?
Merigo – who in person comes across as intensely focused, choosing his words carefully – prefers not to talk about Galaxy, deflecting any comments on Marguerite’s predecessor to the fund’s core sponsors, none of which could be reached for comment at press time.
However, one senses that Merigo, Pierson and Harrison – respectively the former head of Santander Infrastructure Capital (SIC), a former partner at SIC and an ex- executive director of Macquarie Capital Funds Europe – have done their due diligence on Galaxy and come away convinced that Marguerite will be different.
Part of this has to do with the independent component of its five-man investment committee – solely responsible for the fund’s investment decisions – which includes two representatives from Marguerite Adviser and three independent members, none of which come from the core sponsors.
It’s a structure that better protects Marguerite from conflicts of interest when compared with other industry funds, Merigo contends.
“Normally, if you have a fund sponsored by a financial institution – whether it’s a private equity or infrastructure fund – there will be people on the investment committee that are from other parts of the bank,” he explains.
“In our case,” he continues, “the investment committee will be formed by executives from the investment team and independents – people that are completely independent from the core sponsors. These people will be selected on account of their technical qualifications and there will be a guarantee that they are independent.”
“So the decision-making process shouldn’t be more complicated than in any other financial institution-sponsored greenfield fund,” he adds.
Happy with the firm’s independence and decision making process, a more pressing concern in Merigo’s mind is to finalise the recruitment of the rest of the 16-strong team that will ultimately comprise Marguerite Adviser. At present, seven members are on board, putting the team well on its way to being fully staffed by year end. But a key hire remains:
“At the senior level, the core sponsors have decided to have one person who has more experience in energy – Pierson – and another with more experience in transport, which we are still looking for,” Merigo says.
“The rest of the team – the investment directors and the more junior positions – will have several types of greenfield expertise. Because there are a lot of common elements in greenfield projects, somebody who has already done some greenfield transport investments could probably adapt pretty quickly to other types of greenfield investment,” he adds.
Pierson chimes in: “The team will be complementary, so some will have project finance backgrounds, some with principal investment and asset management, and since we are investing throughout the EU’s 27-member countries, we will look for people with different country experience – a mix of nationalities.”
“The other thing I want,” Merigo says, “is for everyone to be involved in both origination/execution and asset management. I think it’s important that all professionals in the team become involved in the asset management – it’s good for the discipline of investing,” he argues.
By definition, Marguerite will seek to invest equity or quasi-equity primarily in greenfield transport and energy projects that form part of the trans-European networks (TENs) – an EU initiative that aims to make sure its members’ transport, energy and telecommunication networks are built to complement each other and strengthen the union.
Even though Marguerite is not allowed to take majority stakes in projects – unless the management board exceptionally approves it – it is aiming to take fairly significant minority stakes.
Which is why Merigo wants his team to “be able to participate in the management of those investments, that we are involved in major decision-making, and for that purpose we are able to sit at the same table as our investment partners and be on a level playing field,” he explains.
Hitting the road
Having half of his team in place will allow Merigo and other senior members of the advisory team to hit the road in earnest, looking at deals and fundraising. It’s a task that he sees as particularly important nowadays, even though he admits being on the road is challenging:
“The market has changed and we have to spend a lot of time educating investors and the best way of doing that is just to visit them and hold one-to-one discussions with them. That’s very valuable because it gives you a sense of what investors are interested in and it also gives them a chance to meet the team and get to know us,” he explains.
“But of course, it’s quite time-consuming. When you are fundraising, and until you reach final close, it’s like having two jobs at once – fundraising and managing the fund,” Merigo says. “But we have all been through it and we are comfortable we can do it again,” he adds.
However, there is a dual purpose to Marguerite’s road-show which is also “to get the word out to developers on who we are, since this fund was created to counter a lack of greenfield money,” Pierson says.
“So we have to go to developers and tell them – ‘look, we can help get your project done, we have the cash, and we don’t have to exit the project at completion to return money back to our investors – this is long-term,” he explains.
Another thing developers will probably be happy to learn is that in addition to bringing equity, Marguerite also comes attached with a €5 billion in debt co-financing.
“At this stage this isn’t a ‘facility’ but rather an initiative by the core sponsors to offer debt to projects Marguerite considers investing in,” Merigo clarifies, with “lending decisions to be made by each institution on a case-by-case basis. Such debt could complement ‘private’ sources of debt in a similar way that Marguerite will complement ‘private’ sources of capital,” he adds.
Treating investors fairly
Active dialogue with investors is a sign of the times. As Merigo puts it: “You can’t go out to investors and say you are going to raise a fund based on x, y, z and you are not willing to make any changes to x, y, z – take it or leave it. That’s not going to work nowadays. There has to be some room for refining certain features of a fund.”
So it comes as little surprise to hear him say that Marguerite Adviser’s fee structure was born out of that same scrupulous process, generating “some unique features which should please investors,” Merigo maintains.
“First of all, the management fee is set on the basis of forecast operating costs – plus a small cushion – and reviewed annually with a cap on the management fee in terms of a percentage of commitments.”
“So that actually answers one of the concerns investors have nowadays which is that they are not getting enough visibility on where the management fee is going. In this case, there is no profit from the management fee and it’s capped at a reasonable percentage of commitments,” he says.
“Now on the carried interest, again, it’s a similar arrangement,” he continues. “Since the core sponsors are not involved in this business to make a profit out of the asset management part of it – but rather to invest and to stimulate third-party investment in greenfield infrastructure – there’s no point in having profit on the management fee and all the carry goes to the investment team.”
That allows the management fee and carry to be lower than the 2&20 prevalent in private equity, though Merigo declines to comment on exact percentages. Like Marguerite itself, Marguerite Adviser’s fee structure was designed very much with the long term in mind:
“We are avoiding structures that encourage short-term speculation,” Merigo explains. “This is a 20-year fund. The executives can’t cash out before the investors get their money back, plus bonuses are deferred. So it’s a long-term plan by definition. That’s important, if you want to make sure investors are treated fairly,” he adds.
Given the speed with which Marguerite has raised almost half of its target capital – and considering that, in addition to institutional investors, there are many other financial institutions across the EU similar to the core sponsors that have yet to invest in the fund – Marguerite appears to have every chance of hitting its €1.5 billion target by the end of 2011.
It should have even less difficulty finding €1.5 billion of projects to deploy its capital across the EU over the next four years. All of which begs the question: when does Marguerite Adviser expect to raise a follow-on fund?
Without pinpointing dates, Merigo is cautiously optimistic: “Marguerite Adviser will advise the Marguerite fund on an exclusive basis. But of course we all hope that there will eventually be a successor fund with similar objectives.”
Marguerite at a glance:
Launch: December 2009
Location: Luxembourg headquartered; Paris head office
Final close scheduled: end 2011
Lifecycle: 20 years
Minimum investment: €20m
Target rate of return: 10% to 14% over life of fund
Capital allocation: 65% greenfields; 35% brownfields
Sector quotas: 30%-40% transportation; 25%-35% energy; 35% to 45% renewables
Investment caps: no more than 20% of total capital in one single EU country; maximum investment size cannot exceed 10% of total fund size.