Greenfield with envy

Infrastructure investing is a patient game. Players have to put in a sizeable chunk of upfront capital and wait, year after year, before earning it back with a small premium. From the point of view of institutional investors, that’s the whole point of the exercise: receive safe and stable dividends over the decades to come.

Still, some versions of the game require a greater deal of patience – and an unusual appetite for risk. Such is the case with greenfield investments, where significant dry powder has to be committed upfront, little or no revenue is received before completion of the project, and unpleasant surprises can happen during its construction. So why would you decide to do it?

One explanation is that some investors have simply lost patience with the poor returns on offer in core infrastructure assets. The language they use to justify their move, of course, has more nuance to it: they talk of a “unique opportunity”, strong deal flow and the potential for outsized returns.

This is the reason why most core infrastructure managers allow their funds to have a small allocation to greenfield. But some have gone to greater lengths to put money where their mouth is – or at least are preparing the ground for it.

Last month, Infracapital, the infrastructure arm of UK insurer Prudential, announced the appointment of ex-3i partner Andy Matthews to “lead its infrastructure investment activities” in greenfield. A spokesperson for the firm later confirmed that the budding team also comprises a junior investment professional, and that another appointment, not yet ready to be announced, is expected to happen in the near future.

Introduced in fairly low-profile terms, the decision actually marks a rather dramatic step for Infracapital. The firm is not completely new to greenfield, but its latest vehicles – including Infracapital Partners II, closed last October on £1 billion (€1.4 billion; $1.5 billion) – were largely focused on operating assets. Though the team has yet to decide how investments will be structured, it told Infrastructure Investor that they won’t be made through its existing vehicles.

The appointment of Matthews, a public-private partnership and renewables heavyweight, shows Infracapital intends to make greenfield a meaningful part of its business. “My background being based in both construction and fund management, it is a good combination to be able to address the needs of the country as well as invest in these assets for the long-term,” he says.

Matthews’s earlier career involved co-developing the equity infrastructure investment strategy of UK developer Alfred McAlpine, as well as structuring and underwriting financial guarantees for the capital market financing of social infrastructure projects at US monoline Financial Security Assurance.

He then moved to UK lender Barclays, where he raised and invested infrastructure funds focused on PPP, concession-based infrastructure, renewable energy and transmission assets, and became a partner at 3i Infrastructure when the London-listed firm bought Barclays’ infrastructure fund business in 2013.

Ambition is also reflected in the first asset Matthews will be responsible for: Prudential’s £100 million equity stake in the £1 billion Swansea Bay Tidal Lagoon – a 320-megawatt power plant project due to become operational in 2018 – which Infracapital will manage on behalf of its parent group.

With a growing pool of capital going after large, core assets – and with sectors such as operating renewables now targeted by large pensions or listed funds – going greenfield looks increasingly tempting. “There is significant government support for newbuild infrastructure to stimulate the economy, and a lot of opportunities there for investment,” Matthews comments.

But building a greenfield strategy from scratch is no light endeavour: much cash, manpower and back office capability is needed to nurture a start-up unit into a fully-fledged business. This may explain why this has so far largely been attempted by the infrastructure arms of large insurance groups, such as Prudential, Allianz or Aviva.

With independent managers less inclined to set up entirely new platforms, those expecting a green revolution may have to be patient.