When we first interviewed Boe Pahari, in March 2015, we did so at a time of significant upheaval. The context of our encounter was manic: taking place in a restaurant on the sidelines of our Berlin Summit, it happened amid the excitement generated by the wall of capital descending on the asset class – and the resulting general partner imperative to schedule as many limited partner meetings as possible within a three-day conference. Pahari, freshly named as global head of infrastructure equity at AMP Capital and in charge of marshalling a debut fundraise, was certainly busy.
Rapid changes were also taking place in and around the team he had just been appointed to lead. In a major departure, AMP Capital had decided to focus on products and services rather than regions or operations, as a result of which a number of its senior staff had left the business. The company’s separately managed accounts and origination functions were merged, allowing for a number of executives to rise to more prominent positions. Many of these changes were pursuing the same objective: building on the business’s strengths Down Under to give it an international remit.
Central to this plan were efforts to raise the firm’s first Global Infrastructure Fund. The vehicle had been created in October 2014 by converting AMP Capital’s Strategic Infrastructure Trust of Europe from an open-ended to a closed-ended structure targeting the world’s developed markets. The firm’s aim was to raise enough capital to bring it to $2 billion, using SITE’s $750 million portfolio as seed assets to entice LPs in the novel offering. Two years on, mission accomplished: AMP Capital closed GIF on $2.4 billion on 29 December after receiving commitments from LPs including Pantheon Ventures, the Ontario Pension Board, School Employees’ Retirement System of Ohio and Nykredit.
In much quieter surroundings than our previous keynote interview – AMP Capital’s London offices – I ask Pahari to take stock of what just happened. From his point of view, the fundraise was an unquestionable success, thanks to support from “fantastic LPs”. He hints that demand may even be building for future offerings. “We pushed the close as late as we could, and we had clients who missed the date. But we will find ways to engage with them, either through subsequent global funds, other vehicles or specific transactions.”
At a time when mega-funds are being raised in a matter of months, AMP Capital’s debut global infrastructure offering cannot claim to have crossed the finish line in a flash. Indeed, in February 2016, some 16 months after being launched, the firm said it was nearing a $2 billion final close on GIF – but it took another 10 months to reach the final milestone. Pahari attributes the moderate pace to the structure’s uniqueness.
“I underestimated the amount of time it would take for clients to due diligence the seed assets. We have a unique proposition here: GIF is the only global fund in the world offered by a global manager that has almost 40 percent of assets committed from day one. If you invest one dollar with us, you have 40 cents pretty much invested straight away. That offers an element of risk mitigation, but it requires due diligence, because you’re not investing in a blind pool. And then summer came into it as well.”
PROVING THE CONCEPT (AGAIN)
An LP we speak to, who says his feelings were probably shared among the wider investor community, lent credit to Pahari’s observation. “It was a more challenging due diligence process,” he says. “It was a bit like a secondaries fund, and the big question mark was about the transfer of the seed assets into this vehicle. What kind of valuations are you buying into to access the fund? Investors liked the high transparency and the visibility of having different seed assets already in the fund. But some of these, in our opinion, were perhaps bought at quite a high entry price.”
While it may have taken more time to enlist LPs, GIF’s wide-ranging investor base suggests that the vehicle’s merits eventually hit home. “We told a lot of our LPs we were seeking consent for a fundraising extension and all of them were extremely supportive. They understood because they’d been through the process themselves,” Pahari notes.
The fund has 22 LPs that came through Mitsubishi UFJ Trust and Banking (MUTB), AMP Capital’s distribution partner on the ground, plus a further 51 from outside Japan. Clients came from Australia, Europe and North America; consultants also supported the firm during the process. “Our LP base counts a lot more new investors. But we also had some existing ones that have stayed, and some actually re-upped. One client even re-upped three times,” Pahari says.
Alongside seed assets, SITE thus provided GIF with a handful of foundation investors. Still, in the eyes of others, AMP Capital’s first global closed-ended vehicle had the trappings of a first-time fund. “AMP is a 160-year old company; AMP Capital itself started venturing into infrastructure 25 years ago. We were the first to invest in the Sydney Harbour Tunnel, and then we were on this side of the pond with our euro fund in 2006. But when we launched GIF some clients told us: ‘You are a first-time fund’. It was a bit difficult to hear, but I do understand their perspective.”
When the firm initially floated GIF, the track record of its infrastructure equity franchise was not immaculate. “We lost a team in 2010, we had retention issues, and we had one difficult asset,” Pahari explains, referring to Spanish oil storage company CLH, which he says has now recovered.
Part of the problem was SITE, an open-ended structure that was “not successful in fundraising”. But mostly AMP Capital was punching below its weight – in infrastructure terms – because it had been complacent for too long regarding its ambitions and strategy in the space. “We’d been a little dormant. Ten years ago we should have been much more aggressive,” Pahari notes. “We had done a lot of things but we hadn’t really hit our straps since some terrific deals like Melbourne Airport or Duet Group.”
READYING THE SHIP
When Pahari was appointed to helm AMP Capital’s infrastructure equity unit, his mission was very clear: give the international heft its parent thought the franchise deserved. “I run a division that is strategically key to growth at AMP Capital, which is based on the internationalisation of its business.”
In addition to guiding an internal reshuffling of the team, he thus set about addressing a number of weaknesses and leveraging potential strengths to make his unit more stable, global and aligned with clients. One dimension of this was to boost the firm’s distribution platform, which he says has grown “very significantly”. In part, that meant using the strength of AMP Capital’s partnerships with China Life and MUTB, as well as banking on the firepower of its parent group in its homeland.
Another priority was to attract and retain great staff, or as Pahari puts it, ensure AMP Capital is “an ultimate destination for talent”. To help achieve this, the team’s carry structure was revamped, in effect linking staff remuneration much more directly to investment or commercial performance. He says retention issues going back to five or six years ago have now been resolved.
“Alignment between client, house and team is very strong now. Before you had an open-ended fund where you had performance fees levied on a yearly basis against some level of benchmark, no matter whether investors were going to realise gains in the future or not. Now we don’t get paid unless the clients get paid.”
Yet challenges facing AMP Capital’s infrastructure equity team have not just been internal. “The infrastructure business is changing. Ten or 15 years ago we were speaking of bridges and toll roads and utilities. As we move forward, the classic core infrastructure space is getting ever more mature, particularly in the current low interest rate environment,” Pahari says. “There is a level of disruption in the market place that we need to confront, notably coming from direct investors. Firstly, they attract talent and then this talent will execute and manage transactions.”
A second change, he notes, is coming from the other end of the spectrum, with private equity firms increasingly creeping in infrastructure’s value-add segment. “They are bringing in a lot more rigour through sector expertise, delivering value through management and mobilisation through to the ultimate sale.”
THE THIRD WAY
But Pahari is undeterred. “Disruption is a good thing if you’re up for the challenge. You can rise through disruption and I think we’re doing that: we’ve seized the assets, made them much more efficient through asset management and we are now able to put that in a global fund.”
I note that AMP Capital’s flagship vehicle, though global in its remit, is some way smaller than mega-funds closed last year, such as Global Infrastructure Partners’ $15.8 billion Fund III and Brookfield Asset Management’s $14 billion third fund. Pahari, however, does not seem to think the comparison is that relevant.
“Every organisation has its own strengths and weaknesses. We are not a Macquarie; we are not a GIP. But I run a business with A$13 billion ($10 billion, €9.4 billion) under management, supported by an organisation with about $120 billion under management.”
What he suggests is that AMP Capital has its own way of doing business. First of all, it would be misleading, for comparison’s sake, to look at the global fund in isolation. Pahari also overseas four other specialised vehicles (the Infrastructure Equity Fund, the Core Infrastructure Fund, the Community Infrastructure Fund and the Irish Infrastructure Fund) and separate accounts. And of course, AMP Capital’s infrastructure equity platform is complemented by its listed infrastructure and infrastructure debt businesses.
Pahari himself is a firm believer in closed-ended funds. “I understand open-ended funds, I’ve lived with them. Every fund structure has its strengths and weaknesses, but on balance, closed-ended funds give you a clear beginning and an end, a level of discrete value added – or otherwise – that the fund manager can demonstrate.”
AMP Capital’s point of difference is its focus on the mid-market, and a relative openness with regards to the sectors it targets. In his words, seeking the various characteristics of infrastructure – high barriers to entry, high EBITDA margins, monopolistic position, operational leverage, inflation hedging or linkages, protection against GDP volatility, and cashflows in the form of annuities – requires “expertise and imagination”.
For sure, AMP Capital is invested across a wide range of sectors – telecoms assets in Ireland and Spain, Melbourne Airport, Port Hedland International Airport, utilities in New Zealand and the UK, and rolling stock leasing – many of which the global fund will now have exposure to. But the firm, like some of its peers, is not averse to making unconventional bets closer to the private equity frontier, on an opportunistic basis.
Two of AMP Capital’s recent investments deserve particular attention. In December 2015, the firm bought Adven, a Nordic sustainable energy company, from EQT Infrastructure. Pahari explains his team was attracted by the asset’s growth prospects – which in the case of this “intriguing business”, may not come from where you expect.
Adven provides heating solutions to vast food processing and storage facilities which supply about 50 percent of what is on supermarket shelves in Finland. These centres require around 500 trucks to take away the food and distribute it to shops in freezing temperatures. The tarmac has to be heated: let a truck get stuck and you risk massive delays. With plans on site and the scale to match demand, Adven provides a cheaper, essential service to food processing plants, Pahari explains.
Another interesting company, which AMP Capital has owned alongside 3i Infrastructure since 2015, is Esvagt – a provider of emergency rescue and response vessels to the offshore energy industry. Given recent oil market volatility, you would expect the company, which operates about 50 ships in the North, Baltic and Barents Seas, to be more vulnerable than most infrastructure assets. But Pahari thinks the company is protected against adverse scenarios. “It’s not about oil production volumes, it’s more around the rigs’ operations. Services such as those Esvagt provides are required by law.” The company dominates the market in Denmark and has a 50 percent market share in Norway. Meanwhile, it is looking at a potentially lucrative new source of business: offshore wind farms.
It’s easy to see why AMP Capital would be looking for investments off the beaten track, with margin for operational improvements: the firm’s global fund targets returns of 12 to 14 percent. LPs seem to like the strategy, but some are waiting to see if AMP Capital can manage to unearth more idiosyncratic assets. “They’ve been around for a long time, so we don’t see them as a first-time player. But we would like to see if they are able to source new deals,” says a European LP.
Proving the concept once again may open up lucrative new markets for the team. “Outside of Japan, Asia was difficult for us this time round,” Pahari comments, referring to GIF’s LP base. “We have raised money there via other parts of the business, so there are lots of opportunities.”
Will AMP Capital be seeking to raise a bigger global fund in a few years’ time? While underlining that infrastructure and GIF are the “flagship” of AMP Capital’s international inspirations, Pahari is keen to remain cautious. “It’s a matter of what our LPs like as well. Right now we’re not focused on that, we’re investing the dry powder we’ve got.”
THE MIGHTY JUNIOR
AMP Capital’s infrastructure debt platform may have been born after its equity sibling, but in some ways it is already a more mature outfit.
Reaching the amount it is aiming for would be a step up in size for the team, whose second infrastructure debt fund closed in 2014 on $1.1 billion. But otherwise, Fund III is business as usual. Which in the case of AMP Capital, is actually not that usual, since the firm focuses exclusively on high-yield subordinated debt, placing it in a category that remains rather sparsely populated.
“In the senior infrastructure debt space, there’s more capital than ever,” says Jones. “In the mezzanine space there’s just a handful of institutional managers.”
All of the team’s three funds target returns of about 10 percent, distributed to investors in the sole form of cash yield as the loan is being repaid. “We charge less than equity funds typically do. We generate proprietary dealflow, we structure and arrange. But we have less opportunity to actively add value, because we are not the majority shareholder,” Jones explains.
I note that this return target is actually higher than the benchmark some equity funds aim to beat, and ask in what circumstances a debt vehicle can achieve such a feat. “We assist infrastructure equity providers with solving a particular problem,” he responds. “We help them on opportunities to add value to an asset.”
Over time, the strategy has enlisted support from about 100 investors across the platform’s three funds. IDF III, the latest of the series, will have about 50 LPs upon close. It already has an Asian tilt: Jones says about 60 percent of the capital so far comes from the region, with Japanese, Korean and Chinese investors a prominent force.