Eyes on the ball

The heart of French rugby may be in the country’s south-west, but the sport has strong enthusiasts in the middle of Paris. Or at least it provides inspiration for two pillars of France-based fund manager InfraVia, shortly after they posed for a rooftop portrait with the Eiffel Tower in the background, with an analogy they like to use to describe their team.

“Some people are like track-and-field athletes. They run very fast but can’t sustain the pace too long. We’d rather think of ourselves as a rugby team: we move more slowly, but because we advance as a pack our progress is pretty solid,” says Vincent Levita, co-founder, chief executive and chief investment officer of the firm.

No matter that a few months before hosting the Rugby World Cup, France failed to lead the pack at the Six Nations tournament. Bruno Candès, a partner at InfraVia, thinks the firm has recently enjoyed better fortunes: a few years after considering scaling up, the firm has become a truly European player, he says.

The odds were not always in its favour. The conceptual roots of InfraVia date back to 2004, when Levita, then at AXA, was among those who founded the French insurer’s infrastructure investment unit as part of its Investment Managers division. In 2007 the company decided that the initiative should come under the responsibility of AXA Private Equity, and following a bit of an organisational rejig he left the business – and had to start the project all over again.

And that’s what he did. Alongside Laëtitia Féraud, a former teammate at AXA and now chief operating officer of InfraVia, he started an infrastructure fund management business with the backing of OFI Group, a French mutual insurer. “We simply thought that our analysis – that infrastructure as an asset class was promised a bright future – was still valid.”

For all his conviction, raising a first-time fund in 2008-2009 was no easy feat. The vehicle, which closed on €200 million, was therefore modest in size – but Levita reckons the money was deployed “very seriously”, allowing the company to own a portfolio of 12 assets. In 2012, when time came to raise a successor vehicle, he could thus go and see investors who’d declined to commit the first time round on a stronger footing. “I was able to tell them: See, I did exactly what I said I would do.”

CONVERTED TRY

Yet while the second fund remained loyal to the firm’s mid-cap focus, it was more ambitious in size and scope. That justified beefing up the team – and that’s when Candès came in. In 2012, after six years spent working for Babcock & Brown, ABN AMRO and Fiera Axium in Canada – the “heart of PPPs at the time”, according to him – Candès thought of coming back to France, where he’d started his career at Vinci, Suez and Egis Group. He liked what he saw in InfraVia.

“The firm was in a sweet spot. It seemed to me that there were a lot of things to do in the mid-market, especially for a GP [general partner]; Europe had become the main market for infrastructure, whereas North America was very much about energy. And then there was also a strong personal fit with the rest of the team,” he says.

The second fundraise was concluded in 2014 on a €530 million close, ahead of its €400 million original target and with a 100 percent re-up rate. But getting a vote of confidence from its early backers did not prevent the firm from diversifying its investor base, which evolved from being purely French to pan-European and saw OFI become a significant but minority provider of dry powder.

Importantly, the less dominant role of the group as a limited partner (LP) coincided with its reduced shareholding in InfraVia itself: while the management company had until then been majority-owned by OFI, from then it was controlled by Levita, Féraud and Candès. “We started off as a small, sponsored team and as we became larger we became an independent one. It’s the natural evolution of a GP,” Levita notes.

Yet while organic growth logically led InfraVia and its sponsor to exist as distinct entities, keeping the momentum going is no straightforward task. “The market is still rather new,” observes Candès. “The opportunity varies according to cycles and sub-cycles.”

The team therefore spends a great deal of time analysing sub-sectors, he goes on. “In 2008-2009 there was a first-mover premium to capture in renewables. Now it’s done and there’s more to be found in the midstream and downstream space. We’re waiting to see, for instance, what the impact of low oil prices on industrial players is and whether they’ll want to take non-core assets off their balance sheets.”

Of particular importance are the efforts the team makes to try and anticipate the direction taken by the regulation in a given country – a question Levita likes to look at through the prism of “convergence”. “Infrastructure is at the junction of public sector demands, industrial interests and the vision of financial backers. These three worlds don’t understand each other well, and part of our job is to find the right equation to make them work together.”

Candès illustrates this point by citing the case of Spain. The need to revive the economy, amid a lack of public liquidity, has since the Crisis led procuring authorities to draft contracts that he describes as largely “investor-friendly”. While a boon a decade ago, he reckons these are looking increasingly risky: in today’s political climate, new arrangements are likely to come under growing scrutiny. “A regulatory accident becomes possible when these three visions start to diverge. It’s a question of balance.”

The blend of solid sector expertise and soft skills needed to ride such waves has drawn a particular profile of professionals to the firm. “Rather than coming from the M&A world, our guys are infrastructure specialists,” Levita explains. “They’ve sharpened their teeth in industry or as part of project finance teams. What they share, on top of strong analytical abilities, is a taste for creating relationships, using commercial flair and originating deals.”

TACTICAL POSITION

Such traits are all the more useful in the segment InfraVia prides itself for operating in – the mid-market. “In a context where larger assets are strongly fought for, many GPs are keen to say they target mid-cap deals. But far fewer actually do it,” Levita argues.

Yet if pointing to alleged abuses of the term seems easy, defining it is less obvious. So what exactly is the mid-market? Levita has a threefold answer. First, as in private equity, deals that qualify often involve assets with an enterprise value of less than $500 million. More pragmatically, he carries on, the mid-market is also the space where direct investors are not yet treading. “This will last how long it will last,” he concedes.

His preferred definition is therefore more conceptual. “What we do, in real life, is to build a portfolio of core to core-plus assets. And that’s the mid-market: non-standard deals that require a bit of work to be brought to an optimal situation.” Originating mid-cap assets, in his words, is thus closer to a craft than a process. These tend to emerge through one or a combination of operations: carve-outs from bigger entities, development through capex or build-ups, or contractual and financial structuring.

Rather than a straight matter of size, Candès reckons it is this complexity that makes the segment a difficult one to enter for direct investors. “The GP has a raison d’être only if it adds more value to assets than it charges fees. So we have to roll up our sleeves to unearth the opportunity.” This value stems from the additional granularity a manager enjoys on given markets as well as its ability to convert “non-vanilla” situations into attractive assets.

Sharpening one’s approach to find deals that are not “on the main street”, Levita observes, is all the more crucial as direct investors are now starting to set their sights on core assets around the $70 million mark. “Even in the mid-market, if an asset is too ordinary it will be expensive. Our view that adding value pre – and post-acquisition is key, developed during the credit crunch, is all the more valid in a market where liquidity is plentiful.”

Initially under the radar, some assets do end up surfacing. Levita recalls a bilateral negotiation, a few years ago, through which InfraVia got very close to paying €50 million for a part of a large European utility’s gas network. Yet the seller later changed its mind and started an auction process. The asset went to a rival – for a higher price. “The utility probably lost six months in execution, but got a few millions more for the asset. Whether it was worth it is only known to them.”

Neither does sound sector analysis always guarantee success. While InfraVia has long found the bigger airports too complex and too expensive, it recently identified regional airports as more promising targets. But the sale of a 49.99 percent stake in Toulouse Airport, for €308 million, to a Chinese-led consortium last year showed that others had already reached similar conclusions – and were willing to pay more. “Strategic players are also starting to come down the deal scale,” Levita notes.

POINTS SCORED

He reckons these have another sector in their sights: renewable energy. In that instance, however, InfraVia probably stands to benefit. “In 2009-2010 there was a big push for renewables in Europe, and after a bit of due diligence we found that France offered the only regulatory framework we were comfortable with. So we started deploying capital from our first fund there,” Levita says. A few years on, he adds, the firm is now contemplating selling the whole lot in one go.

“After a bit of work to agglomerate small and mid-cap assets, we have a portfolio that’s operational, diversified and scalable. That will probably interest specialised funds and direct investors, most of which will be prepared to pay a premium.” As Candès remarks, however, the strategy is not replicable: following the return of liquidity and regulatory changes, prices on many renewable assets have increased in tandem with risk. InfraVia’s latest vehicle hasn’t made any investments in the sector.

The star of Fund II, rather, seems to be its Finnish power distribution platform. Having acquired its first poles and wires business from local steelmaker Outokumpu in December 2013, it purchased Kilpilahden Sahkonsiirto, a regulated network, from refining firm Neste Oil Corporation a year later. It is now in the process of buying three other assets. “That’s the poster child of what we like to do: buy an asset that looks a bit complicated, bolt other ones on to it, and de-risk the whole to make it vanilla,” Levita says.

The firm paid about €70 million for the first network it acquired – the bottom of its target range, Levita remarks. Compare that with the €2.55 billion the Finnish distribution business of Sweden’s Fortum was sold for at around the same time, he adds, and “you understand why such deals happen under the radar”. InfraVia has a different strategy to reach scale, he asserts: in the process of being operationally optimised and releveraged, its power platform will soon be open to co-investors.

A third sector InfraVia has dialled into in recent years is telecoms – understood in its broad sense. “The attractiveness of ‘information highways’, of which towers and fibre networks form part, is well documented. But there also are some opportunities under the radar at the end of the value chain.”

Levita is refering to Etix Everywhere, a French data centre business the firm backed last year as part of a €15 million funding round. The ticket was small – but InfraVia’s ambitions for developing the company evidently aren’t. Founded in 2012, Etix Everywhere claims it has developed a modular data centre architecture that can be deployed anywhere in the world in less than 16 weeks. Levita says it now aims to grow its asset base of 3 megavolt amperes tenfold over the next five years.

THE LONG GAME

Not every avenue InfraVia has explored in the past has delivered on initial hopes. In 2012, when the firm thought of raising a greenfield fund, there seemed to be great potential for snapping up smaller public-private partnerships (PPPs) in France. Yet the idea was later abandoned when deal flow declined, and the team instead decided to focus on deploying Fund II.

But the duo have no complaints about how things have panned out since. Fund I is well on track to deliver its target 12 percent IRR and 6 percent yield, Levita says. And while it’s still early days to predict how its successor will fare, Candès seems confident some of its assets will vastly outperform.

With Fund II now about 60 percent deployed, it’s thus no surprise InfraVia is thinking of launching a third vehicle. And it has a good idea of what its strategy will look like. “In the short term we want to capitalise on our track record and keep our mid-cap, core to core-plus positioning,” explains Levita. “We aim to raise a bit more capital than we did for Fund II, but not so much more that LPs wonder whether we will be able to deploy,” adds Candès.

Investors seem to be responding well to the pitch. “The vehicle has strong traction in Europe, and we could raise Fund III solely from European LPs. But we’re considering diversifying our investor base internationally,” says Levita, who a few hours before our interview disembarked a long-haul flight from Asia. He confides the firm is currently talking to Japanese and Australian institutions as well as US and Canadian LPs.

Another potential inflexion in the firm’s strategy relates to co-investments. “We started off by not doing it. What we were looking for instead were partnerships with other GPs,” says Levita. InfraVia later opened up to the idea, but few mid-market deals were of a size that created co-investment opportunities. Yet as the firm seeks to consolidate its existing assets, deals are getting heftier and offer more visibility. “There’s more room for co-investors to enter. I’m wondering if we shouldn’t industrialise this a bit more for Fund III.”

Whether InfraVia will soon invest beyond its European playfield is a longer-term question. The answer will depend on the opportunity offered by each market and the firm’s capacity to execute – as well as on what investors eventually want. “The relationship between GPs and LPs has become multidirectional. Diversifying our investor base will provide us with a platform for reflection, and the evolution of our strategy will feed from dialogue.”