A safe pair of hands

Q: What are the origins of Dalmore Capital?

MR: In 2009, John McDonagh, Alistair Ray and I decided that, after many years working for captive funds, it was time for us to take the risk of going independent. There was certainly scope for a long-term lower risk proposition like ours and we felt that the offering would be attractive to pension funds. Inevitably, when you set up a business, there are initially questions about its long-term viability, so it took us three years to get to a point where we were getting meaningful growth.

Q: Why has Dalmore maintained a low volatility focus?

MR: Almost all pension funds recognise infrastructure is an asset class they would like to invest in, but actually a lot of pension funds have no exposure to it. Our low-volatility strategy is less of a challenge for those less experienced. Our proposition appeals to those who are interested in the stability of returns and getting a strong running yield from investments.

Q: How do you differentiate yourselves from other fund managers?

MR: A lot of the well-established managers focus on double-digit returns. To buy assets that offer that level of expected return you need to take a lot of risk. We’re very reluctant to take on market-based risks, such as GDP, traffic/usage and energy prices. Instead, we focus on slightly lower returns, but where there is likely to be less variability in actual return delivered. We invested in Thames Tideway and National Grid’s gas distribution business as they share the same low-volatility characteristics.

Q: What have been the key growth drivers for Dalmore Capital?

MR: We took on the PiP [Pensions Infrastructure Platform] mandate in 2014 and that introduced us to the five founding investors of PiP, all pretty large UK pension funds. We completed the fundraising for that fund with existing Dalmore relationships. PiP took us from £400 million AUM to closer to £1 billion. The next big step was Tideway, where we raised a £440 million single asset fund. We’ve found investments that were too large for our main funds so we’ve done managed accounts and co-investments alongside all of the funds. The National Grid deal takes us to over £2 billion under management.

Q: How did the Tideway and National Grid deals originate?

MR: We’d been monitoring Tideway for some time and we’d been in discussions with various parties, particularly Amber Infrastructure, about whether to bid together. When we looked at this, we thought it was going to be a low-risk proposition that would actually deter some of the other managers in the space. On the face of it, it doesn’t look like the ideal asset for a group of investors who in the past have wanted to focus on operational PPPs. When we looked at the way it was structured, however, construction wouldn’t have a significant impact on the returns. Having started the process with Amber, we encouraged Allianz, who were critical in such a large transaction, to come into the group. For us, the Tideway was an important development because it demonstrated that we could be a player in larger infrastructure assets.

The National Grid deal also included Allianz and Amber and after discussions the three of us decided to join the Macquarie-led group with CIC. Obviously, Macquarie has a lot of experience in that space so we felt they would be a good partner for us and then Hermes and QIA came in at a later stage. With these deals, we’re seen as somebody who is a valuable member of the consortium for future transactions.

Q: Where else were you active during 2016?

MR: We completed a £150 million transaction for GLIL in the Clyde wind farm. Ordinarily a ROC-based renewables project would be at the edge of our risk appetite, but SSE’s desire for incoming investors to keep the project debt-free meant there was a good resilience to changes in future power prices. A lot of the work during last year was spent completing investments for the PiP fund, which is now almost fully invested.

Q: What impact has Brexit had on Dalmore?

MR: The assets we’re focused on – because there isn’t much GDP exposure – are very attractive in a volatile market because it actually doesn’t really matter what happens in the economy. The flipside for overseas investors is the volatility in the foreign exchange market, as our funds are denominated in sterling. Initially, European investors were quite cautious. Over time, as people have got used to the idea, the Europeans have come back into the market. Investors from further afield have shown greater interest – some investors consider the fall in the value of sterling and think it is a good time to bolster their sterling portfolios.

Q: How do you view UK government support for infrastructure?

MR: I’ve been very encouraged by how receptive the government is. There are a lot of good people working on infrastructure in government. I think the government’s probably more receptive than it’s ever been to pension fund investment in infrastructure. There’s a focus on making sure some of the larger transactions are structured in a way that is appropriate for low-risk investors. Post-Brexit, the support has been even more noticeable. Dalmore feels that the big opportunity will be to introduce conservative capital into transport projects which are structured with limited variability in revenue.

Q: Will Dalmore seek to expand its focus outside the UK? 

MR: Our primary concern is to continue the focus on lower volatility assets. We believe that we will continue to find good UK opportunities; we estimate that at least 80 percent of the investments made by Dalmore in the next few years will be in the UK.   

There is capacity to invest in Europe and if we do deals in Europe it will be PPP transactions if we think they offer good value. There are some countries in Europe where they’ve adopted the UK model to fund social infrastructure. It’s all about the question of whether you’re getting the right return for the risk.

Q: How do you see Dalmore’s investment strategy evolving?

MR: The main categories of assets we’ll be looking at over the next few years are PPPs, OFTOs, UK regulated assets and potentially the rail and road sectors if there are opportunities without too much demand risk. 

We’ve previously looked at very long hold periods of 25 years, but a number of factors are leading us to consider shorter hold periods of around 15 years. These factors include the pension reforms in the UK, the growth in infrastructure fund of fund investors and interest from other investors who are more used to 10-year private equity-style structures. Such an approach still permits a buy-and-hold approach with a focus on income yield returns.
We are also targeting more opportunities that have potential for co-investment, given the level of appetite and, crucially, the increased ability of investors to deliver on indicative interest in recent years.

Q: What else is being targeted for 2017?

MR: Right now we’re looking at a significant follow-on transaction in the PPP space and a number of investments in the regulated space. We’re in a position at the moment where we can probably acquire £400-£500 million of assets in the first half of the year if all goes well.