Notes from Berlin

There was a clear mood of optimism at this year’s Infrastructure Investor: Europe forum in Berlin. That’s not to say that our past events in Berlin have been doom-and-gloom but this year, with its largest attendance ever and plenty of fresh faces from institutions looking to invest in the asset class, there were connections aplenty to be made and a lot of ground to cover.

The event started on day one with a keynote address from Anthony Rabin of UK developer Balfour Beatty which reminded attendees that infrastructure has not exactly had a spotless past in the minds of many institutional investors. “Infra fund performance hasn’t been great,” Rabin said bluntly, offering strategy drift and over-leveraging as two key reasons why the promises of steady returns have not been delivered to some investors who backed infrastructure funds in years past.

This set the stage for a lively discussion between fund managers and fund raisers about the state of the infrastructure fundraising market for 2011. A poll taken at the outset showed that infrastructure had the best fundraising prospect of any illiquid asset class and two-thirds of conference attendees said they were “very” or “somewhat” optimistic about prospects for infrastructure fundraising in 2011. Still, difficult questions are now being posed by limited partners, and conference delegates were not afraid to put them out in the open. “At the end of the day,” said Mounir Guen, chief executive of placement firm MVision, “why pay a third-party manager for a toll road? And why sell the toll road after five years?” Funds offering value propositions such as this, he said, are unlikely to be successful.

Infrastructure bankers likewise found themselves tackling existential questions at the event. Gershon Cohen, global head of project finance at Lloyds Banking Group, said banks effectively face a to-be-or-not-to-be moment: “The banks’ raison d’etre is to lend. The question is: what is the nature of that lending?” He answered the question as follows: “I don’t happen to believe that the long-term banking finance that was evidenced from 2001 onwards is the right solution for these types of models [PPPs]. I do believe in the capital markets, in institutional investors playing a much bigger role in financing these projects. Finding the role for the banks is the challenge we have.”

The audience had mixed feelings on this point: 54 percent said in a poll that the capital markets will never take over the banks’ role in financing infrastructure, while 25 percent said they’d take over that mantle in just 5 years’ time, with another 14 percent predicting it would happen in 10 years.

When Niels Konstantin Jensen, portfolio manager for $91 billion Danish pension ATP was asked on stage whether he’d consider investing in a collateralised loan obligation backed by PPP debt, he seemed a bit gunshy: “We might”, Jensen said, adding that it would depend on what other opportunities he had available at the time and how attractive the returns were.

Readers of our website will recall that, just a few weeks after our Berlin event, Lloyds halted plans to offload £1.5 billion (€1.7 billion; $2.4 billion) of project finance initiative debt into the capital markets because investor interest was deemed insufficient.

Then there was beer and schnitzel, and all retired for the night.

Day two

The next day, the conference resumed with an outlook for the macroeconomic environment for infrastructure investors, which, according to Tina Hagenberg of Partners Group, “will play an even more important role in infrastructure investments” in the future.

Buying opportunities are likely to increase, Hagenberg said, because as governments see their debt levels rise, they are likely to outsource more of their infrastructure services or, as in the case of Greece, sell their infrastructure assets outright. On the supply side, rising inflation will make infrastructure relatively more attractive to institutional investors looking for an inflation hedge, potentially leading to increased flow of capital into the asset class.

One high-profile investor looking to build out an infrastructure portfolio – the $230 billion California Public Employees’ Retirement System – made its debut appearance on the infrastructure conference circuit. Portfolio manager Christine Yokan detailed the pension’s plan to build a $5 billion infrastructure portfolio via what she called a “partnership” model: “We’re most importantly looking for partners who we can work with over a long period of time. We expect those to be relationships that will help us build our programme. And we’re looking for like-minded partners in the investments,” Yokan said.

One “like-minded partner” was sitting beside her as she made the comments – Andrew Gillespie-Smith of Global Infrastructure Partners (GIP), who took questions from Yokan on how the pension’s investment in GIP-owned Gatwick Airport is faring these days. Gillespie-Smith detailed the operational improvements GIP has made to the airport since taking over in December 2009 and also took the opportunity to directly challenge a frequently-heard talking point on the infrastructure conference circuit: that infrastructure assets are resilient to economic downturns. 

“Infrastructure per se is not resilient,” Gillespie-Smith said, pointing out that resilience is a function of the individual asset – not the asset class as a whole. “Certain assets within infrastructure are extremely resilient and certain assets are not resilient,” he said. And even when a manager finds a resilient asset, “you can make the equity not resilient by putting in the wrong capital structure and overleveraging”.

Turning to Gatwick, he said the airport has seen its passenger numbers fall about 10 percent throughout the economic crisis, indicating that it is not as resilient as its larger rival Heathrow but still an asset capable of weathering the economic downturn better than smaller, more regional airports with less diversified airline traffic.

“You need to pick your asset carefully. Certainly not all airports, not all infrastructure is resilient,” Gillespie-Smith concluded.

And so, with traditional views challenged, new limited partners introduced to the asset class, vigorous debates held and plenty of food and drink consumed, the conference was wrapped-up. Till next year.