A tale of two markets

There was a time when France was riding high on state-sponsored greenfield projects. Partly because of its industrial heritage as a nation of developers and train-makers, partly because of the need to boost the economy in the financial crisis’ aftermath, the early 2010s saw the country go big on high-speed rail and highways. It helped that Nicolas Sarkozy’s centre right government was keen on PPPs: the private sector got invited to come on board, with projects ranging from transport to social infrastructure angling for equity backers.

Speak to most industry players today and you will soon understand that this market has ground to a near-halt. One reason for that may be that a lot has already been done. “France is already quite well endowed with transport infrastructure. Quite simply, there’s only so much you can build,” a Paris-based fund manager told us. But there are also more specific constraints. Like a number of EU countries, public finances are tight in France – and political winds have become more hostile to the PPP framework.

“It doesn’t help that the last few projects haven’t been overwhelming successes. On the Tours to Bordeaux toll road concession, for instance, traffic commitment has been questioned,” says Mathias Burghardt, head of infrastructure at Ardian. Romaric Lazerges, a partner at Allen & Overy, points out there was at least one failure in the social infrastructure space that might have also had a dampening effect. He also underlines that PPPs in France remain complex: “We’re struggling to do repeat deals. There are no common market clauses, which often makes reaching financial close expensive.”

Carole Arribes, a partner at Clyde & Co, highlights that many projects can actually be undertaken as straightforward concessions, “a very good instrument that everybody knows”. PPPs, she says, have intricacies ranging from legal and technical matters to the financial and fiscal front. Public entities often lack the experience and skills to manage them, she observes, which is why they should be reserved for big flagship projects.  

But the government does not seem to be going down the PPP route even for these big flagships. The Grand Paris, a 10-year, €35 billion transport master plan for the capital, looks set to be undertaken as a classic public project. CDG Express, a €1.7 billion rail project linking Paris to its largest airport, is expected to be started as a “public-public partnership” between state-owned Aéroports de Paris and SNCF, with CDC Infrastructure possibly taking a stake.

Greenfield projects are still on the cards, but Julien Touati, corporate development director at Meridiam Infrastructure, says the low-hanging fruit is gone. He thinks the latest highway schemes – the A45, A355 and A831, for instance – are likely to be very reliant on the public purse. “The most profitable stretches of toll roads have already been built. For future projects, availability payment schemes are probably more optimal both for investors and for public grantors,” Touati explains. These roads will probably need to be propped up by significant subsidies – something not every investor will be comfortable with.

The greenfield pipeline hasn’t completely dried up, though. Renewables offer interesting opportunities, especially after the passage of the Energy Transition Law last summer. “The overall procurement process and attached government support has been greatly simplified,” says Arribes. “In the current framework the market has a much greater role to play.” The €47 billion ‘Investments for the Future’ programme also allows the state to support projects not only through debt but also through direct equity stakes. 

HEADING FOR THE EXIT

Still, greenfield renewable deals don’t amount to much: projects tend to be relatively small or involve risks fund managers and their backers are not yet ready to take. In contrast to the strides the industry is making in the UK, offshore wind hasn’t yet propelled French renewable investors forward. It is not that France is not trying to catch the wave: power developers and equipment makers are in the process of deploying billions after two rounds of tenders were issued. But offshore wind farms are too early in their development stage to welcome yield-seeking, risk-averse institutional capital. 

In the meantime, fund managers have to invest their dry powder. Luckily, brownfield infrastructure is coming to the rescue this year. High up on everyone’s radar are two airport privatisations, with the government looking to sell majority stakes in the Lyon and Nice regional hubs. The process, which should have started earlier this year, has been delayed due to recent regional elections, insiders say. But the transport ministry seems committed to setting them in motion in the coming months, with a closing expected for autumn this year.

Airports may well be the state’s only divestments before next year’s presidential elections and observers reckon delaying them was not a good idea. “The government has lost a few potential bidders, as now the process is coming behind London City Airport,” a fund manager says, referring to the UK hub sold by Global Infrastructure Partners and Oaktree Capital for £2 billion ($2.8 billion; €2.5 billion) in late February. “Competition will probably be less intense.”

Yet many potential bidders are already queuing to check in. Meridiam, for instance, has teamed up with Spain’s Ferrovial to position itself on both hubs. Not a classic move for the greenfield-focused manager, but market sources believe the opportunity to deploy significant capex could attract other such players. Luxembourg-based Cube Infrastructure, which completed its spin-out from French lender Natixis in January, is meanwhile partnering with Geneva Airport to participate in the Lyon auction. Renaud de Matharel, chief executive and managing partner of the firm, expects strong competition for both hubs. “It will attract most of those who failed to clinch London City,” he predicts.

Several wild cards could also make an appearence: Chinese bidders, who won an auction for a stake in Toulouse Airport last year at a price that raised many a manager’s eyebrow, and direct French investors, which Olivier Jaunet, a managing director at Crédit Agricole, says are becoming increasingly active on their home ground. CNP Assurances, Predica and CDC will likely take part, joined by the country’s top-line developers. “It would be surprising if Vinci isn’t selected in at least one of these deals,” says an adviser close to the process.

Other headline brownfield deals are set to surface this year. With the first generation of infrastructure funds looking to liquidate assets, a number of mature assets will change hands, likely attracting bidders from many corners of the globe. That may be the case of oil storage business Pisto, with Macquarie already looking to bid for Antin Infrastructure Partners’ stake before the process has formally started. Also in the crosshairs will be Coriance, a district heating company KKR is looking to divest. 

Some assets – leaning perhaps even more towards the private equity side of infrastructure – will also hit the market: TCR, an airport services group owned by mid-market buyout firm Chequers Capital, is said to be on the flight plan of about 20 bidders so far. “All the usual suspects are there,” says an adviser connected to the asset, who reckons the deal could fetch anywhere between €130 million and €500 million.

ALTERNATIVE ROUTES

With competition likely to be fierce for the few headline deals, it is little wonder that a number of Paris-based fund managers are looking beyond the country’s borders. Stephane Ifker of Antin, for instance, thinks the firm will not have more than 10 to 20 percent of its €2 billion Fund II invested in France. Still, he sees a number of sectors, like telecoms, worth dialling in on. 

Vincent Levita, chief executive and chief investment officer of InfraVia, also sees fibre optic as a promising avenue. Concessions will be undertaken at the regional level, with the bigger ones potentially requiring investments worth about €400 million over six years – 20 to 30 percent of which will be covered by equity. Telecoms towers will be a more complicated topic for the time being, he expects, at least until clarity emerges as to how many mobile operators will remain in the market. “For now valuing them is largely uncertain,” adds Levita.

In such a context, “much more work” is needed to maintain returns, Levita argues, either to achieve a transaction (by securing carve-outs or other complicated situations), build scale (through build-up acquisitions) or improve operations (by growing asset management teams and getting closer to management). Complicated situations are also what Meridiam is looking for, Touati says, citing the firm’s recent endeavour to merge the Port of Calais with that of Boulogne-sur-Mer. 

Structuring the project as a quasi-availability asset, securing subventions and credit enhancement support from the European Investment Bank and relaying the scheme’s ambition to regional authorities required Meridiam to start a dialogue very early in the process, he says, hinting that political connections and savoir-faire are a must to secure such sizeable deals.

Standalone size, however, may soon cease to be such a prominent criterion. Thanks to recent legislative changes that saw a number of contracts come under the umbrella of the Marchés de Partenariat (MDP), a procurement framework that puts greater emphasis on private investment, small public greenfield projects can now be awarded to a single lead contractor and agglomerated in portfolios – to then be tendered out to other investors after the development phase is done.

Such arrangements would work particularly well for sectors in great need of private capital, but where investing in tiny standalone project makes little sense: the MDP framework could bring them economies of scale on legal, technical and financial matters while allowing equity sponsors to improve the capital structure by inserting leverage at a higher level. 

Progress is no fait accompli and ironing out the approach’s initial problems will take some time. But for sectors like thermal renovation and energy efficiency, this may well prove to be a light bulb moment for the French infrastructure market.