The yield machine

The second time I meet Andrew Charlesworth and David Marshall – co-heads of the John Laing Infrastructure Fund (JLIF) – they are brisk and full of purpose. Steps are taken quickly and a roomful of John Laing staffers are swiftly ejected from our designated conference room so we can start the interview.

It’s early October, and unlike the last time I met Charlesworth and Marshall at developer John Laing’s Victoria offices, at the height of the London summer, JLIF is fundraising. In fact, by the time this issue lands on your desk, JLIF will have probably increased in size by roughly 50 percent, having raised £155 million through a capital increase.

That will make the JLIF co-heads even happier than when I saw them in early October – and they were already looking quite pleased with themselves. Still, Charlesworth and Marshall have good reasons to be feeling that way. They’ve had quite a year.

Launched late last November, JLIF managed to collect the full £270 million (€320 million; $425 million) it set out to raise on the London Stock Exchange. A few months after that, it again tapped the market for an extra £27 million to capitalise on a surprise offer from developer John Laing. In the first 10 months since launch, it has returned 9.5 percent to shareholders amid a terrible market. And it’s already knocking on the FTSE’s door, with good prospects of getting in before the year has ended.

“We launched at £270 million and hopefully after this capital raise we’ll be at £450 million and at that point, we will be eligible for the FTSE 250 – we’re actually on the reserve list and we might go in in December,” Marshall says cheerfully, before adding: “I think to go from launch to FTSE 250 in a year is quite a spectacular feat.” The FTSE 250 is an index of the 250 largest companies listed on the London Stock Exchange.

Whether you believe Marshall’s choice of adjective is appropriate or not, spearheading JLIF one year after launch doesn’t sound like a bad place to be. Especially when you consider that it’s a new type of infrastructure vehicle: a listed fund sponsored by a developer. No wonder JLIF, which was originally aiming to reach £1 billion in size within five years of launch, is now looking to hit that milestone in three to four years’ time.

A lean, mean yield machine

JLIF’s success is no accident though. On the contrary, the fund’s rapid growth and acceptance among investors is a consequence of its carefully designed structure. To put it bluntly, JLIF is a finely-tuned, low-cost yield machine.

It’s a bit like a low-cost airline, except that it makes its passengers more, not less, comfortable by providing them with the best aspects of the listed infrastructure fund model (transparency, FSA regulated etc) while getting rid of the ones investors least like – such as deal fees, high due diligence costs, uncertain bidding processes and a protracted investment period.

“One of the great strengths of our fund is that as soon as we raised the money, we bought the assets [from John Laing] pretty much within a couple of weeks. So there was no sitting around with idle cash – we were fully invested, with yield straight away and we set out to pay a minimum dividend of six pence per share,” explains Marshall.

There will also be no “idle cash” sitting around following this third fundraising. “In total, we intend to use about £100 million [of the £155 million target] to acquire a nine-asset portfolio from John Laing, plus an extension of an asset in which JLIF already owns a stake; around £23 million to pay for Forth Valley [JLIF’s first third-party acquisition]; and around £30 million to acquire a third-party portfolio,” outlines Charlesworth.

This celerity is a consequence of JLIF’s first offer agreement with sponsor John Laing, which owns some 21 percent of the fund. It stipulates that assets owned by John Laing possessing certain characteristics have to be offered to JLIF first. John Laing is, in essence, JLIF’s cornerstone asset supplier, even thought the fund can buy (and has already bought) third-party assets. The latter, however, are not expected to comprise more than 20 percent of JLIF’s portfolio.

“As we buy assets from John Laing and drive yield from them for investors, the more investment capital John Laing has to invest in the primary market. The more they can win in the primary sector, the more pipeline is available to us in four or five years’ time, after they complete the projects. The expectation is for both of us to grow,” Charlesworth explains, outlining the circular strength of the developer fund model.

JLIF’s close relationship with John Laing also allows the fund to reward its investors with a number of savings that other, non-developer-affiliated listed funds will find hard to beat.

“Firstly, other infrastructure fund managers charge a deal fee on acquisitions – typically of between 1 percent and 1.5 percent on every acquisition. We have no deal fee on acquisitions from John Laing. If we think about the approximate £750 million [of assets] we will buy from John Laing – around £300 million we have already bought, approximately £100 million in this acquisition and about £350 million we plan to buy over the next few years – that’s £7.5 million to £11.25 million that is not leaking to the managers in fees,” offers Charlesworth.

He continues: “The second point is that we spend money doing due diligence, but we do that on assets that we believe we have a very good chance of buying – most of them through John Laing. I certainly wouldn’t say the sales are guaranteed, but we have a much higher chance of clinching them. What the other funds have to do is spend a lot of money chasing assets that they may or may not buy: either because they decide, at a certain stage of the bidding process, that the assets don’t suit them and drop out, or they get to the last bidding round and lose the project.”

What Charlesworth is getting at is obvious: “Chasing a project may cost hundreds of thousands of pounds. If you think about that in yield terms, our competitors are driving between 5 percent and 6 percent yield – 5 percent or 6 percent yield on hundreds of thousands of pounds is several years of wasted money”.

JLIF also seeks to drive down costs in the minutiae. “Take our most recent acquisition from John Laing,” Charlesworth points out. “One of the key things in any acquisition is the purchase agreement. That was already drafted because of previous acquisitions, so the discussion took about 30 minutes and was incredibly efficient. Now the more we can do that, the more value we create for investors coming into the fund.”

Dangerous liaisons?

Security of supply is all well and good, but it won’t count for much if the fund’s limited partners (LPs) are being sold below-par projects. Given its close proximity to, and patronage from, John Laing, what guarantees do the fund’s LPs have that they are not serving as a clearing house for John Laing’s unwanted projects? Or that they are not paying inflated prices?

“There’s a certain amount of concern from investors in the market,” acknowledges Charlesworth, “but we tend to be much more public with the information we have [on account of being listed]. I know investors are concerned about fund managers making fees through cosy relationships so we were very clear from the get-go that we were going to have very clear rules of engagement.”

“Every time we buy an asset from John Laing, we undertake third-party due diligence, third-party valuation. The decision to acquire resides with the board and the board is entirely independent and very strong. Valuations are made by third parties. And the intent of that valuation is for us to pay a fair market price,” he says.

LPs can also derive comfort from the types of assets JLIF invests in. At 6 percent annual yield, it’s obvious that JLIF is targeting the most conservative assets on the block. These are your typical vanilla social infrastructure public-private partnerships: located in fiscally responsible countries; backed by long-term debt with fixed interest rates in place; no demand risk; and steady government contributions paid in exchange for keeping assets in good condition.

The most obvious risk threatening this sort of low-yield portfolio is that JLIF will bungle the running of the assets and thus get a decreased public payment from procuring authorities, which would automatically lower yield. 

But JLIF, being the child of a 160-year old construction company, is pretty well hedged against that. Hearing Charlesworth enumerate the resources JLIF can draw on from John Laing is akin to hearing your multinational-employed friend rattle on about the company car and season tickets he gets for being part of the team.

“John Laing has around 300 professionals which we can draw on for the management of assets. It has its own facility management business. This gives us incredible resources because you can look through the business [John Laing] and find every skill you would ever need to operate and drive value from these assets – and that gives us incredible strength,” he argues.

As Charlesworth puts it, JLIF offers the best of both worlds, because in addition to being able to tap into John Laing’s resources, the JLIF team is also capable of typical asset management – “portfolio management, value enhancement and things like that, where we overlay with other funds”.

The only systemic danger to JLIF’s model is of the ‘Black Swan’ variety, i.e., that the government counterparties to its portfolio would renege on contractually agreed returns and force the fund and its investors to take a haircut. Despite the political demands for cost-cutting surrounding the UK’s Private Finance Initiative (PFI), both Marshall and Charlesworth are adamant that haircuts are not part of the UK government’s plan – no matter how loudly it decries the PFI model.

So far, they have been proven right. The gist of a recent Treasury report on how to cut costs from PFI projects centred on reductions to facility management services (such as decreasing the frequency of window cleaning) which have no impact on yield or debt service. Besides, JLIF’s hedge against sovereign changes of heart is to only invest in countries which are fiscally sound and have a strong PPP tradition.

Still, just because no one likes to see oil spills paint thousands of swans black doesn’t mean they don’t end up washing up on the shore that way. In these times of sovereign indebtedness, only the most incurable optimist (or cynic) will tell you, completely straight-faced, that he is still a firm believer in contractual sanctity – even if those contracts were penned by fiscally responsible, AAA governments.

Fundraising obstacles

For the time being, though, anti-PFI sentiment is little more than a nuisance for JLIF. But it’s not something it can afford to ignore, especially given that the fund is currently on the road trying to raise money.

“We are seriously concerned because the negative coverage is not as factual as it ought to be and that spooks investors – there’s no question about that. The level of pension fund investment in this space [infrastructure] is nothing like what you could expect and a lot of that is down to nervousness. Every time we meet pensions that want to invest in this space, they ask about what’s being reported in the press,” Charlesworth says.

That sentiment is well documented. In a recent survey carried out by schemeXpert.com and Pension Week, which interviewed 44 pension scheme managers, investment directors and trustees, pensions were found to have an appetite for investing in UK infrastructure. However, their enthusiasm was being sapped by the coalition government’s criticism of PFI and resulting uncertainty about how British infrastructure will be funded in the future.

For this immediate round of fundraising, JLIF again seems to be well hedged against market sentiment. “I think we will get a lot of existing shareholders coming in again,” says Marshall. And even though John Laing said it does not plan to participate in the new capital raise – leaving the door open for new shareholders to take a slice – it has said that “if we can’t quite get to the £155 million then it will consider coming in,” Marshall added.

When JLIF next taps the market, it will be at least £450 million in size and a well established brand, making it easier to attract new investors.

Taking leave of Charlesworth and Marshall after a slightly comedic photo shoot involving clandestine trips to fourth-floor balconies we weren’t supposed to stand on, I am, for some reason, reminded of Louis XVI’s immortal line “It’s good to be the king” – as uttered by bygone comedy king Mel Brooks in 1981 film History of the World, Part I.

JLIF’s shoes may not quite be equal to Louis XVI’s golden slippers. But they still look pretty comfortable.