Squeezing an hour-long interview in the diary of a finance executive is rarely simple. Constantly on the move to meet investors, speak to regulators or climb to the top of wind mills, infrastructure chiefs are more elusive than most. And it gets even harder when there are two of them.
So it is a testimony to 3i's ability to get things done that barely a week after floating the idea, your correspondent finds himself on the way to the company's offices to meet Ben Loomes and Phil White, its infrastructure co-heads. Clues to the firm's efficiency were already present in its name: while “Capital”, “Management” and/or “Partners” trail most of its peers' monikers, '3i' is short enough to leave you with 138 free characters on Twitter. The company's headquarters, a bright, functional building in West London devoid of the bling that adorns the offices of many blue-chip fund managers, conveys the same message.
Less obvious is why having two people in charge of the UK firm's infrastructure arm – rather than an all-powerful chief – should help streamline decision-making. But the idea is popular at the top of 3i. “It may be unusual for some asset managers, but it's not unusual for 3i. The firm's got two heads of private equity, two heads of debt management and two heads of infrastructure. In 2014, when Phil and I became co-heads, the idea was to have two people that are complementary,” says Loomes.
While two heads are certainly better than one, these two heads arrived to the role through markedly different routes. Loomes, who joined 3i in 2010, came from secondaries advisory Greenhill Cogent, where he had spent most of his career. His role can be characterised as being one of the strategy bosses, responsible for originating deals and growing the business. White joined in 2007 from Macquarie Group, where he oversaw operations at some of the Australian firm's transport assets. He is the hands-on man of the duo, more focused on asset management. “The 3i team up to that date was really built around origination and deal execution, it didn't have anyone dedicated to looking after the portfolio,” White says.
3i is unusual in at least one other respect: it is a listed infrastructure asset manager. White and Loomes joined after the company's IPO, but they have a good idea of why 3i decided to go public. “There are pros and cons to having a closed-ended fund or a listed fund,” says White. “With 3i Group itself being a listed company, it felt very comfortable about having its infrastructure arm listed on the stock market. And the advantage of having perpetual capital I think was the strongest factor. It fitted well with long-duration infrastructure assets, which are underpinned by predictable cashflows over the long term.”
In addition to being good at managing time, 3i seems to have a good sense of timing. It listed just before the global financial crisis, managing to collect £700 million ($869 million; €786 million at today's exchange rates) through an oversubscribed offering. And it did it again this year: its June fundraise, through which it beat its £350 million target by a £35 million margin, happened just before the Brexit vote. “The business has grown significantly since the IPO of 3i Infrastructure in 2007. And along with the growing listed fund we've also added further third-party funds,” says Loomes.
HARD CORE AND SOFT RETURNS
These are part of a strategic move the firm initiated in early 2015 as it sought to deal with rising competition in its traditional playground. “When the business started, the key seed asset in the listed fund was Anglian Water, a regulated utility. We were able to buy those sorts of large core businesses at good, low double-digit returns,” recalls Loomes. “But with demand for this type of asset now vastly outstripping supply, we've seen quite a dramatic compression in implied returns. The old double-digit returns, say 12 percent, for large core assets have become more like 7 to 8 percent currently.”
3i's reaction was to readjust its sights on the mid-market by targeting deals between £50 and £200 million in equity. “What we find in the mid-market is that there tends to be less competition from the larger pension and sovereign wealth funds just because of the size of the assets versus the size of their deployment programmes,” Loomes observes.
The firm also shifted its skillset and emphasis towards the core-plus end of the infrastructure market, where deals offer higher returns to compensate for a greater level of operations or demand risk. The competitive environment also led the firm to revise its return target to an 8 to 10 percent range, rather than solely aiming for the top end of this bracket.
“In this context, the rationale for bringing in other, third-party funds was to fill in the areas that the listed fund did not compete and which are complementary to the listed fund mandate,” Loomes explains. He cites the example of the fund 3i acquired from Barclays three years ago, which focuses on PPP and PFI assets. “At the lower end of the risk spectrum, with operational PPPs, the returns are too low for the listed fund to bid for these projects. So having a different pool of capital for that sector made sense, and we will continue to look for other complementary areas in such a way.”
Not every fund manager would argue that the PPP sector is worth the detour nowadays. And as far as new-build opportunities are concerned, White agrees. “In the UK and France there's very few of them, and there's a reasonable pipeline in Holland and Norway. But the greenfield market is much thinner than it used to be. The secondary market, though, is very active. There's a lot of equity in PPPs still held by contractors involved in building the projects, and we've seen a number of people starting to raise money specifically targeted at that in Europe.”
Speaking of investors' demands and expectations, how did 3i's backers react to the firm's dive into a riskier space? Rather well, Loomes says. “Investors understood and thought it was a very disciplined approach in terms of refocusing our mandate. And we illustrated that when we decided to sell the fund's investment in Eversholt Rail, one of those large core assets that we thought was worth more to somebody else than it was worth to us. It was quite an unusual thing to do for us, as our fund is more of a buy-and-hold investor. But where we see opportunity to create value for shareholders we can be more flexible.”
3i owned Eversholt, one of the UK's three largest rolling stock leasing businesses, alongside Morgan Stanley Infrastructure Partners and STAR Capital Partners (with PGGM a co-investor of the latter). When Cheung Kong Infrastructure bought the company for £2.5 billion last January, 3i reaped £358 million from the sale, having initially invested £151 million in the business. Sources told us then that 3i had pocketed a 3.3x return multiple on the transaction.
There was a time when the core infrastructure label was more strictly applied, notes Loomes. “When we bought Eversholt Rail five years ago, that was much more in the core-plus space at that time. But it became core over time. And that goes to our strategy: we think we've got the skillset and capabilities to take a core-plus asset, de-risk it, maybe through longer-duration contracts, change in strategy or a different financial structure, and create a business that is more core infrastructure. And then you have the optionality of holding that business as a core asset with a good yield or selling it into the market, which at the moment values these sorts of assets very highly.”
In recent times, that has led the firm to bid against pure-play private equity firms in auctions. Infrastructure firms had lower-growth, longer-term plans, while their buyout peers expected swifter growth but shorter-term holds. “You see an overlap in valuations which means the two are competing against each other,” says Loomes. “Some private equity firms have also found pots of capital which target lower-return, longer-duration assets. So we're seeing buyout houses not just compete for the asset but develop pots of capital for infrastructure.”
Some of 3i Infrastructure's recent investments do not quite fit in infrastructure's more traditional boxes. In April, the firm joined forces with Deutsche Asset Management to acquire TCR, a Brussels-based company that leases airport equipment, like pushback tractors and mobile stairs, from two private equity houses. That prompted a question: what did this asset have to make it more than a straight services business? “We would define it as critical infrastructure because you can't operate an airport without the sort of kit that TCR provides,” answers Loomes.
The company is present in 100 airports, he adds. “They have contract lengths which tend to be on average around five years, but where the renewal rate is very high, given the company's leading position in the market. Effectively it becomes a long-term annuity.”
Another unorthodox move by the firm was its July purchase of a 28.5 percent stake in Valorem, a French wind developer and power producer, for €69 million. “The company has an operating platform of wind farms around France, which are producing cashflows today. And through the feed-in tariff, we have very good visibility on what these cashflows will look like. We've been looking at a lot of renewable businesses but we didn't find one until now that had the right combination of track record, operating assets and management team,” argues White.
A more classic infrastructure play – if, arguably, not quite core either – is 3i's investment in UK mobile tower business Wireless Infrastructure Group, of which it now owns 36 percent alongside a US institution. “The reason it suits our infrastructure fund is that it's got a base of long-term contracts. So it has long-duration and inflation-linked cashflows, and you own critical infrastructure,” Loomes says.
What is more, he notes, exponential data usage across the country means new towers are needed in densely populated cities. “What we like about it also is that while it's got the downside protection of the existing contract base, it's also got real growth potential. You could add to its assets by investing in greenfield towers or acquiring other tower portfolios, either from the mobile network operators or through replicating the model across Europe because WIG is largely a UK business today.”
BUMPS IN THE ROAD
Still, 3i Infrastructure's timing has not always been flawless – even though one of its less fruitful decisions seemed like a good idea at the time.
“Around the same time that 3i founded its infrastructure business, it started doing some private equity investments in India, and around the same time 3i infrastructure was listed it became clear that there was a strong demand for infrastructure in the country. And investors were telling 3i that they'd very much like to invest in Indian infrastructure. The stars were aligned to raise a fund, dedicate a team, and invest in some assets,” recalls White.
The firm raised $1.2 billion in 2007-08 and went on to deploy about $850 million of it reasonably quickly, he notes. Its Indian portfolio soon comprised a varied spread of assets in the roads, power and port sectors. “In the first couple of years the Indian economy was booming, the Indian stock market was booming. Everything was going pretty well. We were expecting to raise a second fund at that point,” White says.
But then the plan hit a bump. As the country's government neared the end of its tenure, internal approval processes for starting tolling operations on highways, new bridge designs, railway routes and mining operations slowed to a crawl. Domestic and international investors got burnt, explains White. “The slowdown is really the thing that has hit all infrastructure sectors. As a result, the completion of projects, often highly levered, was seriously delayed. Given that delays on government-induced projects were often not compensated, and that private promoters just didn't have the money to soften the blow on private-induced ones, the sector as a whole has run into quite a few problems.”
There have been some successes. “We invested in a port that started as nothing and is now one of the largest independent ports in India. We've also invested in the largest independent power producer, Adani Power, which grew from basically nothing to about 11GW today. And we've built out many thousands of kilometres of roads. But turning those into profitable investments as opposed to just operating assets has been difficult. And that's true of other funds,” White says. The firm has fully exited one asset and nearly all of a second one, with another five still in its Indian portfolio.
White is keen to underline that the firm wishes to realise assets at the best possible time. “We go in with the mentality that we would like to hold these assets forever,” adds Loomes. “But we're also very disciplined and conscious that in this market, the hunger for infrastructure assets is very high and increasing.” One asset for which 3i is currently “reviewing options”, he says, is Elenia, a Finnish utility in which it owns a 45 percent stake alongside GS Infrastructure Partners (45 percent) and local pension Ilmarinen (10 percent).
Could Brexit dictate how the firm would reinvest the proceeds? Not necessarily. “We don't have a cap on what's in sterling and what's in euros, so we are entirely agnostic,” White says. Neither did the EU referendum fallout seem to have made it harder to fundraise, which some analysts suspect the firm could attempt after completing its latest deal. Those investors that committed to 3i's listed fund probably agree: amid persistent macro uncertainty and low interest rates, Loomes points out that the shares they bought in July have since provided them with high-teen returns on the offer price. Not a bad endorsement for a re-focused 3i Infrastructure that could be about to hit the road.