The high-flying Dutchmen

For many fund managers it’s all about location. Very often that’s also true of their headquarters: a lot of general partners like to demonstrate success via glitzy offices or a prestigious address, favouring Paris’s eighth arrondissement or London’s Mayfair to more humble postcodes.

DIF probably had other priorities in mind when it set up its current base. It’s not that the meeting room where it received Infrastructure Investor last month didn’t have all the expected amenities – wide windows, nice views, understated art on the walls – a successful company can afford. But instead of being located in central Amsterdam, DIF is a five-minute walk from Schiphol Airport, a very pragmatic choice for a team that
travels as much as it hosts visitors from abroad.

This resonates with the candid approach of its managing director. Tieless, cordial, yet very much to-the-point, Wim Blaasse lends himself to the interview with good grace, taking questions as they come without answering them in a roundabout way. His attitude speaks to the ethos of the firm, one that has grown organically from its modest roots by doing what it said it would do: deliver consistent returns through a water-tight, focused strategy.

It would be easy for Blaasse and his team to be brasher than they are. In late September, DIF closed its fourth infrastructure fund on its revised hard cap of €1.15 billion – €315 million more than DIF Infrastructure III and €150 million above target – after less than six months on the road. The vehicle, which enjoyed a re-up rate of 75 percent, was raised without a placement agent.

But instead of spending too much time on cloud nine, the team is busy deploying the money. DIF Infrastructure IV made its maiden investment at the end of August, when it backed London’s £4.2 billion (€5.7 billion; $6.4 billion) Thames Tideway Tunnel (TTT) through a €140 million equity injection. Blaasse says the vehicle has also been named preferred bidder for a further €250 million of investments.

DIF’s high deployment rate is not easy to reconcile with what is happening in the market. The sort of safe assets the firm aims for are prized by an increasing number of investors and the sectors it targets – public-private partnerships (PPP) and renewable energy – are going through a marked slowdown, at least in Europe. Is this the right environment to be investing a €1 billion-plus fund?

Blaasse certainly thinks so. The firm’s decade-old strategy remains valid, he reckons, and a bigger size doesn’t mean he can’t stick to it. It’s like DNA: the body’s grown bigger and more capable, but its raison d’être hasn’t changed since inception. “Investors look at what we’ve done in the past; they understand the current market. They expect we can do it again.”

It all started off in a basement car park.

In 2005, witnessing how the segment was picking up pace in the UK, two entrepreneurs named Maarten Koopman and Menno Witteveen thought it a good idea to set up a PPP fund focused on continental Europe. But they had little expertise in the field – their last venture had been a diamond tool business – so they went to consult Blaasse, at the time part of PricewaterhouseCoopers’s (PwC) energy infrastructure unit.

Having created the Dutch Infrastructure Fund, the two men set about to bring investors onboard. But soon they were nearing a first close, Blaasse recalls, and a number of questions emerged: “We don’t have a team, there are no assets, who’s going to bring the infrastructure experience?” Hearing their concerns, a potential investor suggested the founding partners recruit Blaasse for good and set up a real business, a deal the trio sealed as they walked back to their car to leave the building.

“What’s different about us is that we started from scratch. DIF was not born out of a spin-off from a bank or an insurance company.” With a headcount of five – Blaasse came to the fund with two former colleagues from PwC – the team started to have more allure. But it still didn’t have any track record or assets. “We faced an uphill struggle. It took us two years to raise our first fund.”

DIF’s early-bird investors had a very different profile. Infrastructure was in its infancy and private equity was generating strong returns without yet being taxed as a risky business. So there was a lot of explaining to do about what the asset class could achieve, especially for a debut team. Which is why DIF PPP – as the first fund is dubbed – only counted wealthy individuals and family offices as initial backers. “Other firms had cornerstone investors backing them. We didn’t. So every million was welcome.”

Then the European Investment Bank came in, helping to attract a few banks active in the Private Finance Initiative space. But the team soon faced a second challenge. “At first, we thought the PPP market would develop on the continent, but it took much longer than expected. So we actually did our first investment in the UK.” The transaction, through which DIF PPP bought a portfolio of five projects from ABN Amro, took a year and a half to close.

Others then followed, again with a strong UK bias: 10 out of the vehicle’s 16 investments were made in the country. But with local managers like Innisfree or HSBC already having a head start in the market, surely DIF ended up compromising on its return target? Blaasse thinks not. “We did buy all the assets during the pre-crisis years, in what was a very aggressive climate. But we sold the fund last year in what was also a very competitive market. As a result we’ve achieved very good IRRs.”

The firm’s second fund, raised in 2007, had a different remit: renewable energy was becoming popular with investors, at a time when feed-in tariffs provided stable yield. With expertise available for hire in the market, launching a dedicated vehicle made sense. By then the company also had shortened its name from the Dutch Infrastructure Fund to DIF, to make itself more marketable overseas.

Allard Ruijs and a handful of greentech specialists joined, and a first close was reached on €67.5 million. DIF Renewable Energy closed a few months later on €134 million.

The vehicle ended up being a one-off, however: renewables then blended with PPPs to form the core of successor funds. But it continued to be an integral part of DIF’s strategy, with up to 30 percent of each vehicle allowed to be spent on clean energy. The balance was earmarked for PPP deals. This recipe was applied to DIF Infrastructure II – in fact the firm’s third vehicle, counter-intuitively – which closed on €572 million in 2010.

Not everything went according to plan. The firm was careful to back proven technologies in the most stable regulatory regimes, Blaasse explains, in effect restricting its investments to wind and solar in the UK and France (staying clear of Spain, which it found a little too wild for its taste). Solar did well, but wind failed to meet forecasts. “It’s a strange phenomenon. The last five years have been especially low compared to the previous 15.”

That led DIF to concentrate on solar with DIF Infrastructure III, closed on €800 million in 2013. The firm is now considering going back to wind with DIF IV: valuations have become “more realistic” as bidders have adjusted forecasts, Blaasse comments.
DIF’s strategy reviews are thus more tweaks on the same theme than wholesale changes to its model. The firm’s rise to the European league, likewise, is a story of organic growth rather than one of aggressive acquisitions. And as fund sizes have gradually increased, new offices have popped up: the firm’s French base was promptly followed by outposts in the UK and Germany. DIF is now active in the US and Canada, after the opening of a Toronto base unit three years ago.

At this point a pause is warranted. The story so far flows nicely, but therein remains a mystery: how did DIF manage to deploy growing sums of money in a market ever thirsty for high-yielding, low-risk assets?

Geographic diversification is part of the answer. Blaasse recognises that, in terms of renewables and PPPs at least, both the UK and France are flagging. But having a base in Canada, and since last year in Australia, means the firm can now benefit even more from the traction PPPs get in perkier countries. “Markets go up and down. The Netherlands were very quiet three years ago, for instance, but now it’s one of the most active in Europe.”

The firm’s narrow sector focus gives it another edge, Blaasse reckons: “We are able to come up with an indicative offer on a PPP or renewables portfolio within a couple of days and we can also perform due diligence very quickly. Sellers perceive execution risk with us as being very low.” Sometimes the firm is not chosen because of the higher price it proposes, he says, but because it offers the certainty of doing a deal.

DIF also prides itself in being a flexible, pragmatic outfit. “In primary PPPs, for instance, contractors sometimes come to us with an approach that’s different from what we’ve done before. Provided it matches our risk/return expectations, we’re open to it. Developers will often come back to us because of this,” Blaasse explains, adding that such relationships give them access to deal flow.

All this is, of course, rather work-intensive: DIF’s team counts about 50 people. Is that not putting pressures on returns? Not really, Blaasse says. “We do more deals than most other parties. But they tend to be smaller deals, typically below €50 million.” Few direct investors find it worth carrying out due diligence on such assets. As a result, transactions are often proprietary, he observes.

DIF’s funds also include a share of greenfield investments, with a view to bumping up returns. “Renewables play this role very well. The construction period is very short, but you still capture a premium. And they’re immediately accretive to cash yield.”

The Dutch firm likes to introduce itself as conservative, but it still has itchy feet. Having established itself as a force to be reckoned with in Northern Europe, DIF last year decided to return to Spain, from which it had largely shied away in the aftermath of the crisis. “Now we’re also starting to look at Portugal like we restarted to work on transactions in the Irish market about 2 years ago,” says Blaasse.

Its first deal Down Under, meanwhile, should be closed in a matter of weeks. More will soon come, Blaasse argues, as Aussie governments look to recycle privatisation proceeds in launching a fresh wave of PPPs.

Notwithstanding its international footprint, DIF could have remained more domestic when talking to LPs. “We could have raised DIF IV solely from European investors,” says Blaasse. But on top of its usual suspects, the firm saw contributions coming from Canada, the US and Japan this time round. The firm now only invests on behalf of institutional clients.

These could be interested in DIF for another reason. While the assets the firm generally targets are too small for large pensions, they arguably jump on their radar once aggregated in a fully operational, cash-yielding portfolio.

That’s not been lost on DIF: the firm hopes to capitalise on growing appetite and firepower among LPs by selling DIF II next year. It is aiming to pocket about €700 million through the disposal. “We see how the market is changing. GIP is trying to raise a $12 billion vehicle… They’re probably notgoing to buy our fund, but in theory they could.” Potential buyers could include existing investors in the fund, Blaasse says.

In that context, will DIF itself try and raise a jumbo vehicle next time round? He is not sure. “We could have raised €2 billion for DIV IV. But you need to be able to deploy the capital. We’d rather raise a smaller vehicle we can deploy in three years than a bigger one where we may face issues to do good investments.”

Blaasse says this measured approach is what allows the firm’s funds to be popular, as part of the “bread and butter” of institutions’ investment strategy. “We’re often the first infrastructure investment of our new investors. They seed their portfolio with a safe investment and then build around it by going higher on the risk curve.” Judging by the firm’s impressive knack at retaining LPs, they seem to be in for the long haul.