Not so long ago greenfield infrastructure was on many an investor’s blacklist. Daringly structured projects exposed to strong demand risk suffered during the Financial Crisis; developers saddled with debt proved unable to complete their part of the bargain on a number of privately sponsored schemes. Some governments reined in procurement of expensive projects, others wrong-footed investors by changing the rules of the game.
Greenfield then made a bit of a come-back – but a cautious one. A lot of funds raised over the past few years had a small percentage of dry powder set aside for newbuild projects; yet managers were often distancing themselves from the strategy, keen to underline that they would only consider using it on an opportunistic basis. Aside from a handful of proven specialists, few funds met the greenfield allocations mentioned in their LPAs.
Yet all the while a shift in mindset was slowly taking place. The outcome of this quiet revolution has over the past few months become apparent: not only are fund managers less scared of talking about greenfield, they’re also increasingly eager to show that they’re able to do it. London-based Infracapital in April provided the clearest sign yet of this trend, when it set up a brand new unit dedicated to the segment with a public-private partnership (PPP) and renewables heavyweight at its helm.
There had been harbingers of this trend. London-listed 3i Infrastructure in 2013 bought the infrastructure business of Barclays with a view to boosting its PPP investment capabilities, a strategic decision it reiterated on releasing its annual results last month. Aberdeen Asset Management last year completed the acquisition of Scottish Widows Investment Partnership, a long-time supporter of greenfield investment.
The rationale underpinning these decisions is rather straightforward. Governments are keen to build new infrastructure to revive economic growth and boost productivity, but don’t have the cash to do it. They’re providing a fresh pipeline of deals and better guarantees to make them attractive (or at least that’s their stated intention). Meanwhile diminishing returns on core brownfield assets, at a time when liquidity abounds, is enticing managers to venture into riskier corners of the market.
But what makes such moves possible is a more nuanced combination of factors. For one, investors and managers alike have gradually learnt to dissociate demand and construction risk, and devised ways to mitigate both through rigorous due diligence and clever structuring. There’s also the realisation that greenfield is not just about risky mega-projects or small-scale PPPs, as it offers plenty of opportunities in between: Infracapital’s portfolio, for instance, includes both a £100 million stake in the £1 billion Swansea Bay Tidal Lagoon project and a £20 million investment in broadband firm Gigaclear.
Accessing such opportunities has become easier, too, thanks to a wider range of channels available to fund projects. Some large investors, such as the Netherlands’ PGGM, have partnered with industry players to source deals of a scale that wouldn’t justify an in-house team. Others are eager to pursue what Andrew Claerhout, head of OTPP’s infrastructure group, calls “khaki” opportunities: the development of newbuild projects through existing portfolio companies. This allows investors to benefit from the stability, experience and expertise of the management already in place while reaping the extra return those opportunities warrant.
One should be careful not to expect a wholesale migration towards such strategies. An adviser we recently spoke with said investors remain somewhat “schizophrenic” about greenfield: while convinced that this is where the real reward lies, many are still reluctant to give managers too much of an open-ended mandate to back new projects. Only the larger, most experienced institutions seem ready to make the jump. And when they are, their trust goes towards those managers that can display an existing skill base, deep-resourced parent company or relevant connections.
Still, the seeds have been sown. Greenfield infrastructure will probably continue to be dwarfed by its brownfield cousin in the near future, but the spotlight it is currently under is good news both for its intended users and institutional proponents.