The X factor

Asset management can be notoriously tricky to pin down. I mean, we all know it is needed, since infrastructure assets do not run themselves, but good luck trying to get to a single definition of it.

There are very good reasons for that, of course, not least that one’s definition of asset management will necessarily vary depending on one’s approach to investing in infrastructure. But in the current environment – where investors’ ongoing hunt for yield and a rush of new entrants is, arguably, leading to infrastructure investments being increasingly made to behave like bonds – where does that leave asset management? And how can managers be adequately compensated when returns are coming down across the board?

Those two questions were very much front and centre for us when we sat down with Antin Infrastructure Partners’ Mark Crosbie, Infracapital’s Ed Clarke and Oaktree Capital’s Scott Litman for the latest edition of our annual asset management roundtable. So it was somewhat refreshing to hear all three confidently state that their approach to asset management remains unchanged throughout this cycle.

“We’ve always been an added value investor and you can’t do that without having sufficient people to add value,” starts Crosbie. “We work closely with these businesses and constantly challenge them to deliver to ensure they remain strong whatever the environment. That doesn’t change and we do that regardless of the cycle,” continues Clarke. “You certainly see more entrants, but for the folks that have been doing this for a long time, it’s all about buying well, staying within the bounds of what you do well and then exiting well,” finishes Litman.

That does not mean that our three participants are insensitive to the pressures created by the current investment environment. In fact, you could easily argue that the high multiples being paid for certain assets today make asset management more invaluable than ever.

“I think that if you’re going to spend more money [buying an asset] you typically believe you have an angle,” argues Litman. “You believe there’s something about your approach to the asset that means you will be able to create value where others perhaps can’t. And that can happen in a number of different ways – it can happen because it’s a nice tie-in to another portfolio company you have; it can happen because you may be able to put a unique financing in place; or it may be down to your particular operational expertise, which makes you believe you can do certain things with the asset over time.”

A more competitive environment also naturally pushes managers to look outside their comfort zone and that, Clarke points out, highlights the need for more engagement.

“In a market where prices in certain segments are higher, you end up looking at areas of the market that need more work, or a slight repositioning, or assets that are part of a bigger organisation but need to be carved out. Those situations involve a much greater hands-on approach than a well established business that is just about carrying on and delivering the yield expected from that asset.”

Crosbie agrees, but believes you need “to have a clear plan even if the environment wasn’t as competitive as it is today. And that plan almost certainly isn't going to be buying the sellers' plan and just delivering it.There could be all sorts of levers to pull, depending very much on the circumstances. It could be about people, strategy, growth, making an organisation more fit for purpose, or driving performance improvements – it differs a lot in every single company.”

Which brings us back to our second question: if asset management is, arguably, more important than ever today, how are managers squaring the circle of increased active management with LP pressure for lower fees?

“We’ve always been unapologetic about fees,” answers Crosbie. “We probably have a bigger team than many in the industry and that is because asset management intensity is very high and you need a lot of experienced people. If you’re going to be a top performer, it takes a lot of intensity and it doesn’t come cheap. So the equation doesn’t work: you can’t have discounted fees, superior returns and best in class asset management. It just doesn’t work.”

The good news, Crosbie says, is that LPs understand that. “LPs want to know exactly what you did in the asset management phase to make an asset or a company better and add value. They are very interested in origination and how you’ll continue to do that, but they are also very interested in going through case studies of what you’ve done with your assets.”

In Litman’s view, investors increasingly know what they want out of infrastructure, which translates into how they view asset management.

“Investors have become more sophisticated and not all of them want the same thing. There are some investors who want core infrastructure and that’s one approach. And then there’s core plus and value added and opportunistic. There’s all these different buckets, but depending on what you want, you can probably circle around an appropriate strategy. Each strategy will involve different risk/return objectives and may also involve different fees, carried interest and expenses, all depending on management style.”

Different paths

While all three participants strongly agree on the continued importance of asset management, that does not necessarily mean they go about it in the same way.

“We’ve never believed in having a separate asset management team,” says Crosbie. “Our philosophy is one of accountability and that you need a wide range of skills to make investments successful. So the same team involved in the origination and execution of a transaction is also involved in the asset management through to exit.”

“We have a little bit of a hybrid,” explains Litman. “We certainly have a wide range of skills within the team and then in addition to that, we have a ‘bench’ of operating partners that have specific expertise in the space from being former chief executives or chief operating officers. Those guys will dig in at the asset level in connection with the rest of the team. They also become a direct link with the senior management of a portfolio company and we then look to create value that way.”

For Infracapital’s Clarke, “being involved in the ongoing management of a portfolio company is time consuming and one of the challenges of doing that at same time as new deals is that it’s hard to maintain focus on either side of the equation. So we do have a separate asset management team, but we don’t operate in silos.”

“The asset management team is key to the acquisition process,” he continues. “They have to produce a plan for the next years following acquisition, ranging from practical taking control issues and significant immediate changes to be done, through to more strategic issues to do with our vision for an acquisition,” he explains.

“What you do also depends on the asset cycle,” interjects Crosbie. “For example, strategy is something you get more involved with at the beginning and we also tend to focus on working capital upfront. If we have a growth plan, management is front-ended to make sure we have a strong enough team in place – and if not we supplement it. Financing and balance sheet efficiency is ongoing and we opportunistically refinance if we can achieve better terms.

“But there are things you do at different points in time – you can’t do everything at the same time, otherwise people get paralysed with initiative.”

The carve-out challenge

And then, as Litman points out, there are times when you may buy an asset with no management team. “In those cases, you need to have a pretty good idea of what you’re going to do with that asset and very likely it’s those operating partners that will get dropped down in the interim to run those businesses either on a short- or long-term basis, depending on what you’re trying to achieve.”

Unsurprisingly, carve-outs are increasingly popular today, given that a lot of interesting dealflow is coming from the sale of non-core assets by balance sheet constrained corporates in the oil and gas, telecom and, increasingly, mining sectors.

“The biggest challenge in a carve-out is that you often find there’s many different touch points for that business within a larger organisation,” argues Crosbie. “If you take something like CATS, our natural gas transportation business, we carved that out from BP and BG. BP was the operator and what we found was there were many different parts of BP that had touch points with that business.

“That means there were people from different parts of BP who might spend a large part of their working week in CATS. But when it comes to carving it out, you have to make sure the business is self-sufficient. Sometimes the people who own these assets take these touch points for granted and don’t even realise how they affect the assets,” he explains.

Other times the asset management challenge is more about a change in the ownership model.

“The public-to-private deal we did with Associated British Ports (ABP) is a good example,” says Clarke. “ABP’s team was very much motivated by hitting each year’s profit target, which they communicated to the market. So you would find that they were doing things like selling odd pockets of land towards the end of the year to help hit targets. At Infracapital we manage our businesses for the longer term ensuring value created is sustainable rather than arbitrary from one year to the next.”

Equally important is how to manage an asset towards the end of its life cycle.

“As you get towards the end of the cycle, you have to ask yourself whether that management team has done a good job for you and if it’s going to stick around for whatever is the next incoming buyer’s time horizon. If that’s not the case, you have to plan succession, because you need to have a credible management team when you sell a business,” says Crosbie.

That aside, it is very often the case that senior management ends up changing after a sale anyway, Clarke points out. “When we first started doing this our working assumption was that we would buy these companies and the management team would remain. And then on our first deal, we almost immediately changed management,” he recalls.

“Selling a business is a big moment in someone’s life – there’s so much intensity that it’s quite difficult for people to just settle into a new environment and adopt a new approach. So you find very often that even if you wanted to keep senior management, change just comes after a year or two. Infrastructure is usually thought of as big things that you buy, but it’s always about the people and how you motivate and align them to what you want to do,” he concludes.

Litman could not agree more: “I think for a period of time – and maybe there’s still that perception among some – infrastructure was seen as safe. That is, you go out and buy an asset, likely with a long-term contract, and you get a bond-like return. What you learn as soon as you buy that asset is that things never go according to plan. Things break, there are outages, regulation – you need to have the right people in place to deal with all of that.”

Getting ready for disruption

Having the right people in place also fosters the kinds of discussions that help managers pre-empt the future disruptions that are inevitably around the corner.

“We’ve all seen how Airbnb has turned the hotel industry on its head. Is it potentially possible for someone to, say, take that sort of model and apply it to car parking? So if you have car parking spaces outside your house or a slot on the road, could you one day be able to rent that so that people could forgo using the local underground car park?” muses Crosbie.

Clarke says those discussions are one of the reasons why Infracapital has decided to embrace broadband and fibre as its next big focus: “In our view, it’s inconceivable that people won’t demand good internet connections and expect them in five years’ time in the same way as having water or electricity delivered to their house. You need to keep challenging yourself constantly to ensure you stay ahead of the curve in an ever-changing world, and that’s why you need teams that span multiple generations.”

For Litman, the onslaught of technological innovation and the accompanying change in mentalities means “it’s becoming harder and harder to anticipate multiple years out. So while we might have had a 10- or 15-year view previously, we are now probably thinking more in five-year blocks, because the pace of innovation is so quick. That means you are really forced to think about the life-span of your asset pool.

“You really don’t want to be the guy left without a seat when the technology shifts.” Spoken like a true asset manager.