Value harder to find after boom

If you mention the words social infrastructure to a European infrastructure investor, odds are high that the next word that pops into his head will be PPP – or its UK variant, PFI, short for private finance initiative. That is not surprising, considering that, until recently, social infrastructure deals comprised a significant part of a very healthy PPP pipeline.

Georg Inderst, an infrastructure veteran and independent advisor to institutional investors, wrote in a December 2015 paper that 732 PFI projects closed in the UK between 1992 and 2012, with an aggregate capital value of £56 billion ($82 million; €73 million). Of that total, 59 percent were social infrastructure deals.

In the same paper, Inderst goes on to say that since 2008, 13 percent of global transactions done by infrastructure funds – just shy of 1,000 deals – were in the social infrastructure space, with the vast majority of those deals in the UK and Europe. So there is a good chance that many of those 732 PFI assets are now sitting in an infrastructure fund’s portfolio.

But PFI/PPP assets are a special breed, with their long-term government-backed cashflows and their low-risk lower-return profile. Plus, they are highly leveraged, often offering a relatively small opportunity for equity investors.

Recently, though, a new kind of social infrastructure deal, outside the familiar confines of the PPP sector, is becoming increasingly popular with a certain type of investor. You can see it in recent transactions done by the likes of French fund manager Antin Infrastructure Partners, or Middle-Eastern manager Asma Capital.

In April, Antin bought a majority stake in INICEA, France’s largest independent chain of psychiatric clinics, from asset manager LFPI Gestion. The purchase, which was the fund manager’s latest social infrastructure deal, saw it acquire 10 clinics with some 1,170 beds and day care places. Founded in 1982, the private operator employs 1,000 people and 50 private psychiatrists under contract. It specialises in day care, care for teenagers and in the treatment of eating disorders, like anorexia and bulimia.

Then, in June, the Islamic Development Bank-sponsored IDB Infrastructure Fund II, managed by Asma, bought into Avivo Group, one of the largest healthcare providers in the Gulf region. Established in 2011, Avivo owns and operates 32 healthcare facilities, including two hospitals, 14 speciality centres, eight high-end dental centres, six pharmacies and two diagnostic facilities. The group, owned by MENA private equity firm A M Partners, caters to more than 1.3 million patients and employs more than 200 doctors.

Both healthcare deals are somewhat different from your typical social infrastructure deal, something Asma chief executive Stephen Vineburg readily admits: “Yes, Avivo is an investment with more of a private equity flavour to it, with more moving parts compared with investing in a hospital in London. But at the same time, healthcare is a sound plank in our asset allocation framework and we saw this as good way to get involved in this sector, keeping with our philosophy of finding good partners to team up with.”

Asma’s decision to invest in Avivo is partly tied to the characteristics of the Gulf region. “In the GCC countries, you have rapidly developing markets that look broadly the same as London and New York, with a big middle class that is driving demand for medical services because they do not want to go abroad to get medical treatment,” Vineburg explains.

“We’ve been trying to capitalise on that trend in two ways – one is by trying to get involved in the development of hospitals, a bit more in the conventional PPP style. The other side is around the clinics, which is how we ended up investing in Avivo. We look at these opportunities as part of our social infrastructure allocation. Avivo is interesting because they offer an amalgam of specialised clinics, with different brands and offerings. We think that is a scalable business across the GCC,” he adds.

Demographics also drove Antin’s investment in INICEA. Following the purchase, Antin senior partner Angelika Schöchlin, who led the deal, said: “When we look at infrastructure in general, we look for assets that offer basic services to society. Given one-fifth of the French population has been affected by a mental disease, there is a clear need for this very basic and important service.”

While clinics are not your average infrastructure investment, perhaps, Schöchlin readily defended INICEA’s infrastructure credentials. “We believe French psychiatric clinics offer very strong infrastructure characteristics. It is, unfortunately, a growing market – we see a very strong demand for treatment in our clinics – and one where there is not a lot of oversupply. It is also an industry with very high barriers to entry, because you need authorisation to run a psychiatric hospital.”


But while it is encouraging to see funds with a higher risk/return profile finding opportunities in the social infrastructure space, what of the lower end of the risk spectrum? One thing pretty much everyone admits is that the great PPP/PFI boom Inderst referred to in his paper is over.

Giles Frost, founding member and chief executive of Amber Infrastructure, which advises on listed fund International Public Partnerships (INPP), a veteran of social infrastructure investing, summarises it neatly: “We had a phase where most of the opportunities were in social infrastructure and we are now in a phase where energy is to the fore.”

So does that mean social infrastructure in countries like the UK is, effectively, dead? Not if you are ready to innovate, Frost answers, using the recently finished Priority Schools Building Programme “aggregator” project, which started in late 2014, as an example. The latter saw the UK government use PFI’s successor framework, PF2, to help deliver 46 schools across the country over five batches (the last one closed in late April) with a funding requirement of approximately £700 million, according to government documents.

But it did so with a twist. “The Priority Schools Building Programme “aggregator” project was innovative in trying to deal with a problem that infrastructure investors and governments have struggled with, which is: ‘What is the ideal size of an infrastructure project?’”, Giles recounts. “When government spoke to the construction industry, they said £80 million to £100 million is the sweet spot in terms of construction lot size. But then the financial industry said that is too small a lot size to get best value in terms of financing costs, with something in the £500 million range more appropriate to drive value.

He continues: “What we then did was to devise a framework that combines the freedom to procure individual batches of schools separately – with each batch at around £100 million in capital value – but superimposed over that you had a single financing methodology that meant the debt finance could be raised centrally for all five batches. That clearly had very positive benefits for the government’s value for money analysis.”

Under the financing framework, insurer Aviva and the European Investment Bank provided around 50 percent of the senior debt for the projects, with INPP also providing mezzanine debt. The winning consortia also contributed equity and subordinated debt as needed. Amber acted as loan administration agent and corporate services provider.

The “aggregator” also took advantage of the current strong investor appetite for infrastructure assets. “Investors were prepared to accept they wouldn’t know exactly when each of those five batches would reach financial close. But they accepted some flexibility on that because they saw real attractions in investing larger wholesale amounts across the whole programme,” Frost explains.

“People who expect the structuring of infrastructure projects to be static need to stand back and look at the wider infrastructure environment. Investors and developers need to analyse the nation’s needs and be ready to innovate established structures to meet the next round of UK infrastructure requirements,” he adds.

That ability to innovate, regardless of where you are on the risk spectrum, will be key to extracting value from a slower social infrastructure market.