Securing a pipeline of deals that will attract investors’ attention is one of the biggest challenges facing new infrastructure firms. And here AVAIO Capital, which was launched in January after the firm’s owners left engineering company AECOM, has a head start.
Describing what he said was an amicable split with his former employer, AVAIO co-founder Mark McComiskey told Infrastructure Investor in January that the two sides planned to maintain a close working relationship. The set-up is for AECOM to source projects that need investment to AVAIO, which last month began raising a $1 billion fund.
“We think this is a real differentiator given our strategy,” McComiskey said, adding that AVAIO would target mid-market infrastructure assets, which typically cost hundreds of millions of dollars. “From the perspective of a sourcing engine, the ability to help an investment firm find interesting projects – you couldn’t ask for a better platform.”
McComiskey, his former AECOM colleague Anthony Gordon and a yet-to-be-announced third senior partner created the firm to invest in what they believe is an overlooked but “attractive niche” part of the mid-market: the construction of new projects and the redevelopment of existing ones.
At a roundtable discussion in November, McComiskey said: “An enormous amount of capital has flowed into buying existing assets. [There are] still good deals to be done there, but we have concluded that it is better for us to focus on the less competitive build-to-core segment rather than trying to be smarter than everyone else at buying core.”
A greenfield and value-add strategy makes having a deal-sourcing partner as prominent as AECOM an important part of a sales pitch during AVAIO’s early days. Even more importantly, AECOM, as part of its agreement with AVAIO, will provide the fund manager with technical support on projects.
AVAIO’s plan is to focus on sectors including water, transport, digital infrastructure and low-carbon assets. According to a source familiar with the fundraise, the firm will deploy around two thirds of its capital in North America and the rest in Western Europe. Targeted returns are in line with “value-add expectations,” the source said.
AVAIO has made only one investment: in a liquefied natural gas plant on the west coast of Mexico, a seed asset purchased before the firm was spun out of AECOM. McComiskey has said that the build-to-core, value-add strategy is AVAIO’s reaction to a market in which returns have been driven up by an expanded definition of infrastructure, with many deals now resembling private equity transactions.
“The returns this sector has generated over the past 10 years are, on average, arguably higher than returns from private equity,” he said. “There is a possibility that this may have moved expectations a little out of line in some quarters. You shouldn’t consistently be able to generate 20 percent returns pursuing a core [or] core-plus strategy.”
McComiskey has said that AVAIO’s strategy of obtaining core assets through a different angle than straight-up acquisitions is an antidote to what many in the industry believe is a coming correction. He has said a downturn would expose the types of assets fund managers are investing in as new capital pours into the sector: “If you’ve been prudent in your capital structure, you can survive a downturn and the imperfect correlation between the revenue-protection arrangements in place for your assets and what actually happens in the economy.”
But before any correction is likely to happen, AVAIO will have to prove it is a viable firm. Although the deal-sourcing arrangement will help it put money to work quickly, a source familiar with its plans added that the firm was not expecting to hold a first close on its fund until the end of this year.
Until that happens, AVAIO will remain a new but unproven manager in the market.