Most fund managers – even those not naturally predisposed to chest-beating – are pretty happy with themselves once they’ve managed to close their funds. Part of the celebration tends to include a public announcement to the media, reminding journalists that their mission has been successfully accomplished.
Not so the two principals of UK bank Lloyds’ infrastructure funds unit – Gershon Cohen, until recently Lloyds’ global head of project finance, and Sameer Amin. As happy as Cohen and Amin might be with the recent close of Lloyds’ debut European infrastructure fund, they are not prepared to disclose any details about the fundraising.
It’s not that they are tight-lipped – both are excellent conversationalists and the story they weave on Lloyds’ infrastructure fund management plans is compelling. It’s only when it comes to the nuts and bolts of their first greenfield infrastructure fund that Cohen and Amin are elusive.
One example: when asked how much money the fund actually raised, Cohen answers:
“Let me tell you about our aspirations for developing a broader funds platform. In the context of our strategy and with the team that we have, we are certainly capable of deploying well over £500 million (€600 million; $792 million), maybe up to £700 million.”
But that’s not the same as saying you have raised over £500 million for the fund. Or is it? Answers Amin, smiling: “That could be an interpretation of what happened. Let’s just say that we have raised a significant investment to fund our objectives.”
To get the full picture on the recently closed Lloyds Bank European Infrastructure Partners (LBEIP), as the fund is known, meant talking to other sources. And what these sources revealed is that the fundraising for what eventually became Lloyds’ first European infrastructure fund did not begin and end in the same way.
Originally, Lloyds was aiming to raise a sole infrastructure fund targeting some €600 million, but, “after being in the market for quite a long time, they had to change their offering to suit investor demand,” one source familiar with the fundraising said.
As the sources explained, LBEIP ended up raising in excess of €200 million, with the remaining €400 million (equivalent) to be split between two sterling and dollar-denominated funds targeting the UK and US public-private partnership (PPP) markets respectively. Both funds are said to be in “the advanced stages of fundraising”, with more to be known later this year.
In the context of building a multi-funds platform, though, the successful closing of Lloyds’ first primary infrastructure fund – backed by blind-pool capital from large European pensions wanting to gain access to the PPP space – is an important milestone.
It’s notable that – perhaps contrary to public perception – Lloyds have been in the equity game for a long time.
In fact, for Amin and Cohen, their latest fund is, in many ways, just another milestone in an equity strategy that dates back to 1998, when both were working at the recently demutualised Halifax, the former building society turned bank.
“Halifax, being a big mortgage lender, saw UK infrastructure as very much aligned with its core values,” Cohen recalls. “The opportunity we saw at the time was the insufficient amount of capital that the key players – the construction companies – were able to put into the formation of project companies. So that’s the beginning of our journey and if you look at those very early PFI deals you will find that we took a significant shareholding in them – which was the gap we filled,” he explains.
PFI, short for Private Finance Initiative, is the UK’s standardised procurement process for PPPs.
By 2006-2007, the bank, now know as HBOS after its 2001 merger with Bank of Scotland, had amassed some 60 or 70 equity investments across several UK PFI projects. But as Cohen put it, “at this point, the bank was beginning to understand more the implications of the incoming regulatory rules and how much capital we would have to put up for equity investments on the balance sheet”
That led to a reassessment of the bank’s infrastructure equity strategy, “and we decided that the best option was to create a fund, which would not only give us the option of tapping into third-party capital for the first time, but would also allow us to reduce the amount of regulatory capital the bank needed to have to support the initiative.”
And so in 2008, a significant chunk of HBOS’ infrastructure equity portfolio was spun out into the £434 million Bank of Scotland Infrastructure Partners, the bank’s very first infrastructure fund, fully seeded with operational projects the team had originated and nurtured from the greenfield stage. The fund’s LPs are five big UK pension funds.
But there was another reason why Cohen and Amin chose the fund route: “Sponsor relationships with our industrial partners are the lifeblood of greenfield PPPs. The idea that we would just conduct some wholesale exit of the portfolio that would leave our partners sitting opposite people other than the original investors for the long term of these concessions – that sat badly with us,” explains Amin.
Amin doesn’t just say this out of loyalty – he says it because greenfield PPPs are the sum total of Lloyds’ equity strategy. This “sticking to our knitting”, as Cohen described it, would serve the team well when they set out to convince LPs that they had what it took to invest their capital in primary deals.
At the heart of Lloyds’ pitch to potential investors was its intention of “creating a strategic solution for larger investors to access this greenfield, availability-based PPP space,” especially large-scale projects, which tend to provide “a bigger bang for our buck,” as Amin puts it.
“We’ve seen some large investors back construction companies,” Cohen says. “We’ve also seen some developers recycle their portfolios by listing funds, so there are different ways people are choosing to generate capital to deploy to PPPs,” adds Amin. But the Lloyds way of doing it would offer investors a greater degree of flexibility than the referenced examples.
“The relationship we have with our investor base is much more of a strategic partnership,” Cohen elaborates. “There is a lot of optionality with us, so money has been made available, both from the bank and from investors to meet what I would term a current and immediate pipeline of opportunities we have identified. So we are fully backed for the business at hand.”
“However, we come across many opportunities of scale in Europe and the UK and with our partners we felt that being constrained by a given amount of capital may start ruling us out of these opportunities. So what our partners are saying is: ‘We will fund your business, we will fund your pipeline, but when these large-scale opportunities arrive, we want to play a role with you in developing this side of the business,’” Cohen explains.
Security of supply is another important issue for the Lloyds team, with Amin and Cohen explaining how their core geographies – Europe (including the UK), the US and Australia – were chosen partly to “allow us to have a continuous pipeline”. “Last year, for example, we were very active in Australia whereas the UK had just had an election and things were beginning to slow down with the coalition government wanting to reassess PFI and all that,” Cohen says.
As the pieces of the puzzle fall into place, a well-rounded picture of Lloyds’ infrastructure fund management unit emerges: from its beginnings as an equity investor from the balance sheet, to the successful recycling of its greenfield investments into a secondary fund, and, finally, its new life as a fund manager of blind-pool capital. That long track record evidences that this was no out-of-the-blue whim to get into the fund management game.
“I think the key question in our discussions with institutional investors was the critical importance of track record, particularly the sense that they had seen us take a portfolio through construction and had created a very high-quality operational portfolio,” Cohen stresses.
If Amin and Cohen can keep the fundraising momentum going for their US and UK funds, then their “aspirations to broaden the funds platform to include infrastructure debt and renewable energy funds” could have a good chance of becoming a reality.