“It was an idea we had in mind for many years,” Ardian’s head of infrastructure Mathias Burghardt says, launching into the story of how the French fund manager decided to raise a vehicle that would focus primarily on the US market, as well as on Canada, Mexico and Latin America.
This idea originated, in part, from discussions with Ardian’s partners – the major industrial, energy, construction and utility companies that have fuelled the firm’s deal pipeline for more than a decade.
“For a few years now, they’ve been asking us, ‘why don’t we do things together outside Europe?’,” Burghardt recalls. Ardian took that under consideration and discussed it with its investors, who also showed an interest in opportunities outside the ‘Old Continent’.
“But, we had a European fund and it wouldn’t be efficient – neither from a tax perspective nor from a currency perspective to invest in US dollar-denominated assets from a European fund,” Burghardt explains. “So, we decided to set up a side vehicle. That was the beginning, which also explains the size,” he continues. “It’s rather small, with a lower diversification rule because the idea was to do four to five deals, alongside our LPs from [Ardian Infrastructure] Fund IV.”
The Americas vehicle is, indeed, modest in size, especially when compared with Ardian’s European funds – Fund IV closed on €2.65 billion in January 2016, while the firm will seek to raise €4 billion for Fund V later this year, Infrastructure Investor reported in February.
Starting out with a $500 million target for its Americas fund, Ardian easily exceeded its initial target reaching a final close on more than $800 million in May.
“The success was beyond our expectations,” Burghardt says, adding that the firm could have easily gone on to raise $1 billion and had to turn investors away in December, just three months after reaching a first close. “We were already oversubscribed by that time.”
But the vehicle’s modest size was also part of its appeal to many of the LPs committing to it.
“It’s very funny, because, in the beginning, we thought European LPs would mainly be interested, since for them it’s an opportunity to expand and diversify their portfolio beyond Europe with someone they know,” he explains.
“The real surprise is that we have a lot of US investors, which we didn’t expect at all. We thought US investors have a lot of US exposure and they tend to work with US GPs, so why would they want to go with a European fund manager to invest in the US?”
The answer is equal parts Ardian’s reputation and track record and serendipity: “I think we were lucky, in the sense that we came at a point in the market when there is no real peer to us in the US,” Burghardt states, noting that there was an equal split between North American and European LPs – 42.5 percent from each region, with Asia making up the balance.
“The real surprise is that we have a lot of US investors, which we didn’t expect at all.”
“You either have very large fund managers, like Brookfield or Global Infrastructure Partners, who have global mega-funds of $10 billion or more, but the segment is already quite crowded,” he continues. “For mid-cap transactions, you mainly have energy funds, but their risk profiles are quite different, taking on much more private equity-like risk.
“So, having someone like us, targeting mid-cap transactions where there is probably less competition, with a moderate risk profile, yield and good performance – there aren’t that many players,” he remarks.
Having said that, Burghardt is quick to add that this will eventually change. “But, we really entered the market at the right time; timing was perfect.”
Ardian may have been busy fundraising last year but that did not prevent its infrastructure team from seeking out and finding investment opportunities. Around the time the Americas vehicle reached a first close, Ardian finalised its first deal through the fund. While technically a European company – LBC Tank Terminals is headquartered in Belgium – the bulk liquid storage facilities operator’s main activities are based in Baton Rouge and Houston. The company’s ‘dual nationality’ may also explain Ardian’s decision to finance a portion of this investment through its fourth European fund.
Earlier this year, another US deal followed, exclusively financed through the Americas fund. In March, Ardian announced its partnership with Transatlantic Power Holdings to launch a renewables platform. Skyline Renewables, which has already made its first acquisition, a 60MW wind project in Texas, will focus on acquiring operating and development projects in the onshore wind sector with a view to building a 3GW portfolio.
An important factor that led to Ardian’s decision to partner with TPH was the company’s management team.
“TPH was founded by former Iberdrola people,” Burghardt explains, referring to the Spanish power utility Ardian has partnered with in the past. “So, Martin Mugica, TPH chief executive, and his team are coming from a global utility and were extremely successful building a leading US renewable energy platform,” he adds. “It was also a matter of supporting entrepreneurs, which is very much part of our DNA.”
But, aside from TPH’s management, the sector itself was another major draw for Ardian.
“Even though the market is competitive, we can still find good risk-return opportunities,” Burghardt comments. “If you have the right connections, the right skills and you support the right entrepreneurs, the renewables sector is an excellent investment opportunity.”
He’s also not too concerned about the current administration’s pro-fossil fuel stance. “The US system has been very much driven by tax incentives,” he explains. “But, the US market is a PPA market, which means electricity is bought at market prices. Therefore, we don’t have the issue we faced in Europe, where suddenly regulations changed and suddenly your tariffs were cut in half. In the US, the risk may be in weaker dealflow. So, it’s not that we’re facing risk on an existing asset. That’s the first point,” he says.
The second point has to do with the US political system.
“Certain things are driven at the federal level, but a lot of things are driven at the state and, sometimes, the municipal level. I don’t see California or New York or many other states changing their strategy towards renewables,” Burghardt remarks.
While the fund manager generally seeks an 80/20 split between brownfield and greenfield assets, Burghardt acknowledges that due to the opportunities in the US, the Americas fund may end up with a slightly greater exposure to greenfield. The latter also include repowering – tearing down and rebuilding wind farms that have been in operation for 20 years or more that are no longer efficient.
“Repowering will be a major trend all over the world and we have the expertise to do it, since we’ve already done it in France,” he says, referring to Kallista Energy Investment, a French wind energy developer Ardian sold in April to Canadian renewables company Boralex for €223.4 million.
Beyond renewables, the French fund manager would also consider gas-fired power plants but draws the line at coal. “That is not our strategy,” Burghardt remarks unequivocally.
Transportation – particularly brownfield assets – is fair game, though, and within the scope of its Americas fund.
“One of the things that our investors like is that we’re very balanced between transport and energy,” Burghardt says. “But the US is much more an energy market, so while we aim to be as balanced as we are in Europe, we might have a bit more energy [including renewables] in the US.”
PERMITTING THE ‘MAIN HURDLE’
“One of the hurdles for greenfield projects in the US has been permitting,” Burghardt states. “If you want to start a greenfield project in the US, it could take years. There’s an absolute need for a strict permitting process, but it needs to be made more efficient.”
Efficiency, however, does not mean compromising on environmental protections or the interests of communities affected. “In Europe, it’s not that we don’t care about the environment or that we are less conscientious of a community’s needs, it’s just that, generally, administrative processes are more efficient,” he explains.
“It’s an issue that requires both Republicans and Democrats to work together and to find common ground, because permitting is really the main hurdle not only for developing new infrastructure but also for refurbishing existing assets,” he says, voicing an opinion that underscores the views of many fund managers in the industry.
The other issue that needs to be resolved, but which is still secondary to the permitting issue, according to Burghardt, is for the two major political parties to reach consensus on funding.
“Both Democrats and Republicans have agreed that there is a need for a $1 trillion-plus infrastructure programme. The point of contention is agreeing to what extent the private sector will be involved,” he says.
“Both Democrats and Republicans have agreed that there is a need for a $1 trillion-plus infrastructure programme.”
“But, I would say that that is almost a technicality. There is a common vision that there is a need for new infrastructure, which is important.”
While the US will be a primary target for Ardian’s Americas fund, it will not be the only one. The fund will also look at Canada (which Burghardt deems “very competitive”), Mexico, Chile (where Ardian has already invested) and potentially Colombia, when the latter gains OECD status.
While the bulk of our conversation centres on Ardian’s latest initiative, there are other topics that crop up. One of those is the tightening of regulations surrounding foreign ownership of critical infrastructure assets.
“It is a trend,” Burghardt admits. “I don’t think that a certain degree of control over who owns strategic assets is necessarily negative,” he comments. “The question is, how far will it go? I think probably we are entering a period where there will be excessive control in some areas; that’s a fact.”
But Burghardt goes further and zeroes in on what’s fuelling this trend: “Unfortunately, the benefits of globalisation have not been equally distributed among the population and this, in turn, has led to populism. Let’s face it, this trend is not happening by chance. What we have to change are the reasons these barriers are being put in place.”
Burghardt’s social-minded comments are clearly reflected in Ardian’s practices. In 2010, the firm established the Ardian Foundation, which aims to help talented young people from disadvantaged backgrounds achieve their potential through education, both by providing financial support and by making staff available for a one-on-one mentoring programme.
Another example is the sale of Kallista Energy in April. Under the terms of that transaction, Ardian committed to sharing a portion of the value created during its ownership by paying bonuses – at least one month’s salary – to every employee of the wind energy developer. Speaking of salaries, the conversation also turns to economic growth – nominal versus real – and the risk of rising inflation.
“My fear is not particular to the infrastructure class,” Burghardt comments. “My fear is that if we have growth without salaries recovering, that will not last for long. We need inflation not to please infrastructure investors but because inflation is also a sign that salaries have started to recover and that the sharing [of benefits] we talked about before is occurring. That’s how we achieve sustainable growth.”