Know thyself

It should be recognised that there are “two games in town” in private infrastructure investment, according to Thomas Putter, chairman of our recent Infrastructure Investor: Berlin event. You can either seek to buy infrastructure businesses and drive higher returns through operational improvements; or you can invest in infrastructure assets that provide yield safely and consistently. “Either can be successful,” said Putter. But, for the sake of clarity and to avoid confusing both yourself and your fund investors, you have to play one game or the other – not both.

Words like “steady” and “predictable” have been used so often in an infrastructure context that it conjures visions of armchairs, pipes and slippers. Make an initial outlay, sit back and watch your unspectacular but perfectly acceptable returns come rolling in. Apparently, however, not everyone likes this sedentary approach.

Whirlwind

Take Global Infrastructure Partners (GIP), for example. In an onstage interview in Berlin with CalPERS’ portfolio manager Christine Yokan and our own Cezary Podkul, GIP principal Andrew Gillespie-Smith discussed the whirlwind of operational activity unleashed on Gatwick Airport since GIP acquired the asset in October 2009.

After just one to two months of ownership, GIP had introduced – for example – a new check-in product, a new security lane to improve efficiency, introduced larger security trays and various other measures to address queue blockages. By June 2010, it had completed a £1 billion (€1.2 billion; $1.6 billion) capital expenditure programme and, by July, had launched a new transit system between the airport’s North and South terminals (previous owner BAA had planned to introduce the same system by October, after the summer rush).

Notably, (a point picked up by the British media) Gatwick survived the severe December 2010 snowfall rather better than rival London airport Heathrow having, in Gillespie-Smith’s words, “revisited snow processes” and established a “war room” which would include representatives of all Gatwick’s airlines and which would spring into action whenever an extreme event such as this occurred.

Reproducing these observations about its Gatwick investment is not in any way intended to be an endorsement of GIP’s approach by this publication. Ultimately, the firm would be the first to acknowledge that it should be judged on its eventual exit from Gatwick and the return delivered at that point. The changes implemented may or may not lead to big profits for GIP and its investors – only time will tell. The interesting thing – in the context of what we might call Putter’s theory of industry bifurcation – is that GIP knows exactly what it wants to be. The firm’s guiding light is private equity-style value creation, and it will confidently tell anyone who’ll listen.

Other infrastructure fund investors may be suffering from more of an identity crisis. If they want to be value creators but are not quite sure how it’s done, they should have attended the asset management panel in Berlin. Here, some of the intricacies of the art were chewed over. From my notes, I present the following questions:

*Do you typically have a 100-day plan (maybe even a 1,000 day plan) in place before an asset is acquired?

*Do you appreciate the local flavour of energy companies in countries like Germany and the need to understand the different mindsets of local and national politicians?

*Do you understand that asset management is not all about managing assets? It’s also about building stakeholder relationships – with politicians, unions, customers and others.

*Do you assume that fixed cost bases are fixed? Don’t.

*Do you often invest as part of consortia? Remember then to work painfully hard on a shareholder agreement that ensures alignment on key points – and avoids what one panelist described as a “mucky consensus”.

The panel was certainly an eye-opener to me and to anyone else who may have harboured the suspicion that “asset management” is little more than a handy public relations tool. Those who think of it that way don’t understand asset management, and may never be true value creators.