The path to graduation

Q: When did you start investing in infrastructure?

RB: Our maiden commitment dates back to April 2004, in one of the Macquarie Funds. We subsequently committed to a couple of additional funds then evolved to co-investments with these managers, and now we are clearly engaged on the direct route. We still commit capital to funds, but these follow more ‘niche’ strategies: either in terms of geography – we’ve recently committed to a fund based in the Philippines – or in terms of sector focus, such as renewable energy or public-private partnerships (PPPs). We also try to be creative and spend time asking ourselves what the best approach is to gain exposure to particular sectors.

We are a team of 15 people, which for a global mandate is still relatively small. We moved one person from Amsterdam to New York late last year and now have three people there. That’s on top of the eight staff we have in Amsterdam, as well as our team of three in Hong Kong. The wider group is headed by one managing director.

Q: So why did you decide to move towards direct investing? Isn’t it much more resource-intensive?

RB: There is no doubt it requires a great deal of work. When I switched internally from our fixed income group to help set up the infrastructure programme mid-2005, I was the only portfolio manager and from then on we had to build everything from scratch. So we outlined a path where we would start by investing in funds, progress to co-investment and then invest directly. And along the way we built up the team to be able to originate, execute and monitor investments.

Why did we do that? It’s all about control. If you commit to a fund, although there are guidelines it’s only after four or five years that you know where your capital went. If you invest more directly that’s something you have immediate discretion on. But it’s also about costs control: if you employ 15 people, it’s much cheaper to go direct. You don’t have to pay management or performance fees and whatever costs that would come on top of them – which allows you to generate better returns. It also provides you with a kind of steering mechanism as to where you want to grow your portfolio in terms of overall portfolio construction: if you think you are over-exposed to the water sector, for example, then you can perhaps try and purchase power distribution assets.

Over time, by bringing in experienced people and gaining knowledge ourselves, we’ve also learnt to take on a more active approach at the asset level, notably by taking board seats ourselves and making sure we have the right governance arrangements. So really it’s all about control.

Q: What else have you learnt since you first contemplated going direct?

RB: What we rapidly found out is that it’s important to analyse not only the transaction but also the competitive landscape around it. If it’s an auction, in particular, you have to know what your chances of winning the transaction are. We have seen Scandinavian assets for sale, for example, which at the outset look very interesting – and if you dig deeper they really are. But if there are six or seven consortia already out there you should really consider why you think you can successfully lay your hands on it. Do you have a lower cost of capital, better connections, taxes advantages, or a deeper knowledge of the sector? Are there synergies with other investments you’ve made? If not then you’d rather think twice before putting time and money into bidding for the asset.

We don’t have the 50+ people that some of our peers – such as some large Canadian investors – have so we can’t take part in every auction. We probably have to make decisions earlier and by focusing on whether we have an edge over the competition and can bring something more to the asset, such as additional capital to fund future growth.

Q: A decade down the road, do you think infrastructure has brought you what you expected?

RB: Overall yields are perhaps a bit weaker than we expected initially: we had in mind yields of four to six percent and we probably are at the lower end of that bracket. Return-wise, however, we are quite happy. Obviously there are some ups and downs in the short term but in the longer term we expect to deliver what we promise. Our clients are satisfied and have increased their allocations, which has allowed us to grow the fund. We have not experienced any pressure from our investors – in terms of investing more – because they know it’s rather competitive out there. We don’t want to be cutting corners and changing our way of working: we still do thorough work before we commit because we really want to understand the business case before deploying capital in an asset.

One thing that’s perhaps evolved since inception is the weighting of risks. In the early days when we were working on how to approach the market and how to start, we thought that the regulatory environment was a positive. Now clearly it’s become a major risk. What you’ve seen happening in renewable energy, Norway or the UK water sector shows you that it’s not because an asset is regulated that it’s guaranteed to generate stable returns. So we’ve learnt to analyse that risk.

Q: Has the attitude of fund managers changed since you started investing direct?

RB: Not really, although perhaps they take a bit more time before showing things to us. We might come across them as partners and the next deal they can be our competitors – but that’s the way things work. When you’re only committing to funds sometimes you can also be competing against yourself, since some of these funds have a bit of overlap.

Are some reluctant to bring us in, though, more so now than before? That’s very possible. If they can make more money by bringing deals to others via a fund or via a large co-investment they probably will. We are in a position to negotiate a bit given our size and experience, so we are probably less willing to accept the classic ‘2 and 20’ fee model as others might. I continue to think funds are a valid proposition – but maybe not for the large investors like us.

Q: Do you see any obvious challenge over the next 12 months?

RB: In the space of three to four years the capital available to chase the same deals has grown tremendously. So although competition is healthy that’s clearly requiring investors to adapt their strategy. You’ll need to be more creative in terms of how you structure the transaction or perhaps proactively approach someone who owns assets you like: best to avoid the paved path to a deal and seek side roads where you can use your intelligence and connections to find transactions. We also try to work with other institutional investors, since they might bring things to us just as we might bring something to them. And sometimes we might even compete, which is no problem.

Q: Is investing in greenfield a way to lessen competition?

RB: That’s indeed something we’ve learnt to do over time. We have room for greenfield – not 70 percent perhaps but 10 to 20 percent is feasible. If you understand greenfield risk and work with third parties that are able to mitigate it then it allows you to see a return pick-up in the early days. One downside is that you’ll probably receive limited yield to start with but this can be compensated by the other positions you have as part of a diversified portfolio.

If you’re involved early and you’re committed to stay in long term, it’s also makes it easier to get your hands on certain transactions. If you try and buy in when the asset is about to enter its operational phase you’re likely to face competition from a few more would-be buyers. If you’re in already, by contrast, you may be able to grow your position: the project’s construction companies may think they’ve had their run-up in terms of equity returns and look to put their money elsewhere. So perhaps they’ll be keen to sell at least part of their holding.