The ‘change catalysts’

The Goring Hotel, situated near London’s Victoria railway station, appears to make a good case study in how to manage an asset well. Founded in 1910 and run throughout its history as a family business, it was voted top hotel in Europe for 2010 by Travel & Leisure magazine. It is also reputedly the favourite hotel of the British Royal Family, whose official residence at Buckingham Palace is located a mere stone’s throw away.

Such accolades would likely meet with nods of approval from three of the guests that are gathered in the hotel’s boardroom on this March afternoon: Mark Crosbie and Angela Roshier – representing fund managers Antin Infrastructure Partners (based in Paris) and DIF (Amsterdam) respectively – and Sebastiaan Ranner of MN, the Dutch pension fund manager. After all, the three of them are well versed in the demands and merits of good asset management. They care passionately about it – and it’s what they’ve gathered here to discuss for the following couple of hours.

Once pleasantries have been exchanged and seats taken around the boardroom table, the conversation begins with a question of definition. Investment professionals (and mere onlookers such as myself) may have an instinctive understanding of what asset management means. We know it when we see it, perhaps. But are we able to articulate it?

Crosbie offers the view that a wide range of activities come under the asset management banner when applied to a portfolio company. Among them: strategy; the quality of management and making sure you are working with the right people; incentivisation; governance; driving an ESG (environmental, social and governance) policy; risk management; and capital expenditure (capex).

CASH FLOW PROTECTION

Roshier’s perspective is a little different.

Whereas Antin’s focus is primarily on economic infrastructure such as ports and roads, DIF is focused mainly on Private Finance Initiative (PFI), Public-Private Partnership (PPP) and renewable energy assets characterised by “long-term fixed contracts”. She says the focus of DIF, in an asset management context, is at least as much on protection of cash flows – through such things as compliance, health and safety, sound contract management and technical issues – as it is through revenue enhancement where “the upside is more limited” [than for those fund managers with a higher risk/return profile].

As a limited partner, how does Ranner view asset management? “We look at managers and how they create value through increasing operational efficiencies, for example by adding similar companies or similar infrastructure assets to an existing platform to achieve synergies. We like GPs that can demonstrate thinking out of the box – for example, buying a port and adding renewable infrastructure assets on the port site utilising experience of different sectors within the same team.”

As if rising to the challenge of referencing ‘outside the box’ thinking, Crosbie says: “Our ports business [Euroports] had a Finnish pulp and paper business. The dynamics of that industry were shifting to the developing world. The shareholders suggested creating an industry group with experts from Finland transferring their knowledge and expertise to the [firm’s] Spanish port, which had good Latin American connections. Now, we have a paper facility being built in Spain.”

MISCONCEPTION

This is the kind of active asset management that, in Crosbie’s view, people observing the infrastructure asset class often do not appreciate. In private equity, operational improvements have long been talked about if not always delivered. By contrast, infrastructure is often thought of as a more passive play – simply sit back and the steady, reliable income streams will come rolling in as if by magic. In his view, nothing could be further from the truth.

“Our view is that people underestimate infrastructure,” says Crosbie. “These are real businesses with real challenges. If the right management is not in place, we can be a real catalyst for change. That’s the starting point for us. Infrastructure is not necessarily blessed with world-class managers so we have to find them and get them aligned and incentivised.”

Roshier adds that the challenges of asset management differ according to the maturity of the asset. “You have can allow management to make significant money if they deliver our investment case. We always make them invest their own money in that plan. But first you have to get the Key Performance Indicators (KPIs) right so they understand what they need to deliver. The plan may not actually be in place for 12 to 18 months after we have invested.”

He adds that “with profit improvements you might have to spend cash in order to get the improvements” and that it might be two years or more after spending the cash that the planned improvements come through.

This demands understanding from LPs. Adds Crosbie: “The great thing is we’re not operating in the public markets. We’re in it for the long term and we’re below the radar. Investors understand what we’re trying to do. We have 35 LPs and every time we make an investment we sit down and take them through in detail the case for the asset, what we can do, and the timescales we require, so they understand the road map from the outset.”

“You can’t tackle everything at once,” he continues. “You have to look at the potential returns versus the time invested. It’s a question of focus. With Euroports, out of 21 ports we’ve put a lot of focus into six or seven. We’ve not ignored the others, but on those six or seven we and the other shareholders have really brought in the heavy lifting gear.”

IN THE FACE OF THE UNEXPECTED

Much of the conversation has revolved around the need to put in place careful plans, with targets to be met during the period of ownership of an asset. This paints a picture of asset management as a tool that can be deployed to drive long-term value in a systematic way. But that’s surely not the whole picture. What about what might be termed ‘responsive’ asset management – the need to get involved operationally when something unexpected happens? 

“We had to deal with one of our UK facilities management (FM) contractors going bust,” says Roshier. “That kind of thing doesn’t happen very often but it’s a hassle when it does. It takes up a lot of management time when you hear the FM provider has got issues. Your first thought is ‘who will keep the asset running?’ In the end we managed to bring in a replacement FM contractor and the IRR was hardly impacted.”

Fund managers are not the only ones exposed to surprises – LPs can also find themselves facing unexpected circumstances, argues Ranner. “The biggest surprise for us was the actual level of regulatory risk,” he says. “Infrastructure was promoted as a relatively stable investment for 20 or 30 years but unexpected regulatory outcomes can have a strong impact on future cash flows and we’ve seen that in areas such as energy and water in Europe and the US.”

There’s something else that surprises Ranner – the tendency of some infrastructure fund managers to hide their light under a bushel when it comes to asset management. “Not all GPs provide total transparency,” he says. “We work with the asset teams but it’s not always clear what they are doing. Hence, a lot of good work at the asset level goes unnoticed.”

Perhaps this helps to explain why the role of asset management in infrastructure continues to be underestimated. “People have seen infrastructure as this bond-like investment with minimal effort involved,” reflects Crosbie. “The reality is that you’d better pay attention to things like regulatory risk. You need a hand on the tiller.”

Both he and Roshier have provided plenty of reasons why they deserve to be taken seriously as active managers of assets. Ultimately, it will be for the likes of Ranner – the man sat between them – to be the final judge and jury.

AROUND THE TABLE

MARK CROSBIE, ANTIN INFRASTRUCTURE PARTNERS
Crosbie’s infrastructure experience spans the asset class from energy (utilities and oil & gas) to transportation (toll roads, rail, ports and airports) to telecoms (fixed line, mobile and satellites) and includes transactions in the UK, Europe, Asia and North America. He sits on the board of three of Antin IP’s portfolio companies: Euroports (continental European bulk ports operator), Porterbrook (UK rolling stock company) and Andasol 1&2 (Spanish thermo solar plants). Prior to joining Antin IP, Crosbie spent seven years with Centrica plc where he was director of corporate strategy, development and mergers & acquisitions and a member of the executive committee. He joined Centrica from UBS after a 14-year career as an investment banker in Europe and Asia.

SEBASTIAAN RANNER, MN
Ranner, fund manager private equity and infrastructure, joined MN in 2007. MN is one of the largest pension administrators and asset managers in the Netherlands. It manages assets worth more than €75 billion for a wide variety of pension funds in the Netherlands and the UK. Ranner is responsible for managing private equity and infrastructure fund investments and is a member of a number of fund advisory boards. Prior to joining MN, he was with Holland Corporate Finance where he advised on international mid-market M&A transactions. Prior to this, he was with ING Real Estate International and ABSA Bank (South Africa).

ANGELA ROSHIER, DIF
Roshier is DIF’s senior managing director and head of asset management. DIF is an investment management firm specialising in renewable and PPP assets. DIF has invested in over 80 infrastructure projects throughout Europe, with a total project value of around €10 billion across three distinct investment funds. In total, over €800 million has been committed to these funds. Prior to DIF, Angela was a member of 3i plc’s and Actis’s infrastructure teams. Over the past 14 years she has contributed to the origination and asset management of a wide variety of infrastructure assets in the PPP, renewable energy, water, airport, oil tanking and railway sectors, both in Europe and emerging markets.