Given the name, it’s surprising to be told that fund manager AXA Private Equity has more or less the opposite of a private equity approach to investing in infrastructure. Mathias Burghardt, head of infrastructure at the Paris-based firm, insists this has been the case ever since AXA Group’s infrastructure business was launched in 2005 (becoming part of AXA Private Equity in 2007).
“Most of the team here come from a project finance or industrial background,” he points out. “We’re about long-term investing [the firm’s current Fund II has a 20-year life] and teaming up with industrial partners to implement a core infrastructure approach.”
It was an approach which, until the financial and economic crisis struck, was out of tune with the times. “In 2005 we were the only ones who had this strategy, it was seen as very timid,” says Burghardt. “It was not the trend. But vindication for what we were doing was provided by the aftermath of the Crisis, in which assets that were well managed proved much more resilient than those which had been the subject of financial gearing.”
Teaming up with industrials is not something that comes naturally to those with a private equity approach, says Burghardt. “It’s very difficult to be short-termist and exit-driven when you team up with an industrial because they don’t want to be selling the assets. They are in it for the long term even when they are minority stakeholders.”
In continental Europe, where AXA Private Equity makes approximately 80 percent of its infrastructure investments, Burghardt insists that a long-term, yield-driven approach is not so much the best choice as the only sensible choice. “Privatisation is a sensitive issue in many countries and, even where it’s not, people still care deeply about who is the ultimate owner of assets. We thought that having the support of the AXA brand would provide a lot of comfort to ordinary citizens as well as to public authorities.”
“Compared with investment banks, our image is certainly an advantage,” he adds. Being part of a bank doesn’t sit well with long-term investing when “debt and M&A mandates could put the asset manager in a difficult position” he insists.
Since the crisis, it could be argued that AXA Private Equity’s previously unfashionable approach is now very much du jour. The firm has had a highly active year so far, with new deals including the acquisition of a 50 percent stake in Autopista Trados 45, a section of the M45 highway in Madrid, from Cintra; and the acquisition of Neoelectra Group’s Brittany wind farm assets.
The firm was also part of the Tram-Tiss consortium, which was awarded the €1.6 billion Reunion tram-train public-private partnership (PPP), only to see the deal cancelled by the Pacific island’s new government in April this year. “It’s more challenging to deal with a process led by regional rather than central government. Central governments tend to be more straightforward,” Burghardt reflects.
Arguably more likely to reach completion smoothly, therefore, is the €7.8 billion concession contract to build and operate a 300-kilometre high-speed rail line connecting the western French cities of Tours and Bordeaux. The Lisea consortium – comprising AXA Private Equity, VINCI and Caisse des Dépôts – was awarded preferred bidder status for the 50-year contract at the end of March, and is expected to invest more than €600 million of equity. An announcement regarding the finalising of the contract was expected “within weeks” a source close to the deal indicated at the time of going to press.
For VINCI and AXA Private Equity, this marks the second rail-related public-private partnership the firms have worked on together in France, after the €1 billion GSM-R rail communications project that closed in February.
“When we decided to team with Vinci on high-speed rail it was in the context of being the most long-term kind of investment you can make,” says Burghardt. “It was important that our partner had the ability to construct but also was a long-term concessionaire. Vinci had a more clearly defined concession strategy than many construction companies.”
The point about having a long-term industrial partner is more telling than it might seem at first glance. It might be assumed that industrials would by nature be long-term investors. According to Burghardt this is not the case – and he points to certain industrial groups regularly selling interests on the secondary market as evidence of this.
In terms of new deals, Burghardt feels there is less opportunity around now than earlier in the year. “Back in May, there were a lot of opportunities and we had never been as active as we were then. There were maybe fewer transactions then, but there was much less competition. Now there are more deals, but also more competition. We’ve been very cautious in the last few months.”
One thing that has certainly not lessened in intensity has been the debate over appropriate fund models for infrastructure investors. Burghardt was an interested observer at Infrastructure Investor’s Berlin forum earlier this year, where the subject was addressed in depth.
“I think what was really interesting about Berlin was that people really touched on the differences in the market,” says Burghardt. “In the market today you have the investment bank-affiliated funds which are 10 to 12 years and have an incentive mechanism driven by exits. They are incentivised to sell assets as soon as possible with a good multiple and not hold onto assets over the long term.”
He adds: “For me, infrastructure is about inventing or designing a specific mechanism which will align team and investor to keep the best assets for the long term and allow them to deliver a steady yield. The conclusion of our internal brainstorming on the issue is that, ideally, carried interest should be based on the ability to deliver yield over a number of years.”
He reveals that, at the Berlin conference, he found himself nodding in agreement with the views of Robbert Coomans, adviser to the board at APG Investments, who forcefully made the case for a yield-based fee model. “I fully agree with him [Coomans]. I think your carry should be calculated based on the actual cash you’re delivering every year to investors. It should be tailored to regular yield performance.”
Such issues are particuarly pertinent for AXA Private Equity at the current time as the firm is on the fundraising trail for its third infrastructure fund. Although it is unable to comment on the progress of the fundrasiing due to regulatory restrictions, market sources say the firm is aiming to raise €1 billion-plus.
The firm currently has around €1.3 billion under management across its two existing funds. While the current fund raised €1.1 billiion, the first fund was a €200 million vehicle formed specifically so that AXA Private Equity could acquire a stake in SANEF, the French motorway operator. It is understood that Fund III will follow the same strategy as its predecessor, focusing on investments across France, Italy, Germany and the UK.
Crucially, targeted assets will be core infrastructure. It’s what attracted Burghardt to his employer in the first place. “I was a pure infrastructure guy coming from the project finance world and AXA Private Equity had a pure infrastructure model,” he reflects.