The evolution of asset management

Thierry Déau of Meridiam explains how a hands-on approach to infrastructure investment is critical to mitigating risk – and maximising returns.

Thierry Deau

This article is sponsored by Meridiam

To what extent has the infrastructure industry become more hands-on in its approach to asset management over the past decade?

A hands-on approach to asset management has been our philosophy from the outset. As long-term investors, we consider it essential. But there have been people who have viewed assets as merely a line in an Excel sheet in the past and that failure to actively and appropriately manage those assets has caught up with them.

I think these failures have really brought home the importance of asset management and it is being viewed as far more of a priority. Genuine, active, asset management requires a lot of hard work.

Where are infrastructure investors focusing their attention when it comes to asset management and has it changed?

There are three fundamental pillars to an asset management strategy in the context of long-term investment and I don’t think that has really changed much over the years. First, there is engagement with third-party stakeholders and government in particular. That’s a really important piece and requires a specific skillset. Second, is proper and adequate governance of the assets, dealing with contractual counterparties, and third is ensuring we derive all the possible upside and mitigate the downside risk with strong support from shareholders. That is why we always place dedicated people within the assets themselves as well as running a central asset management team. Today, we have around 110 people within our 73 assets because we believe that in order to be efficient at each of those three levels you need to have the right people on the inside.

Has your approach to relationships with management teams changed in terms of level and nature of interaction?

Almost half of the 250 people at Meridiam are working inside our assets, which gives you an indication of the level of priority we put on direct interaction. Yes, we operate at a board level from a governance perspective, but we also have key executives on the ground – CEOs, CFOs, CTOs and COOs. Those people are a constant link between the business and us as a shareholder.

We also provide a lot of assistance in terms of best practice and technical support. Where we have assets that are alike, we unite people into sectoral clubs. We have a tunnel club, for example, and we also have an airport and a rail club. The asset managers on those different projects meet on a regular basis to share knowledge and expertise. We also pool insurance on multiple assets, for example. It is very much about managing the portfolio as a network. In addition, it is important to us that the asset managers interact with our originators. There is a crucial feedback loop there in terms of ensuring that what happens downstream impacts what we are doing upstream.

Purple Line: leading from the front

Meridiam has invested $97 million in Purple Line Transit, making it an 70 percent shareholder in the project to build a new 16-mile light rail line in Maryland. Once construction is completed, the firm will operate and maintain the line for 30 years.

This new line will provide faster, more direct, more reliable and better connections to several existing transit providers and improve mobility and connectivity to major economic and jobs centres.

Powered by overhead electrical wires, The Purple Line has no air emissions and is estimated to take 17,000 cars off the road daily, saving one million gallons of ga within 20 years. Purple Line light rail vehicles have been designed with special wheel profiles to reduce noises and disturbances.

The project has been under construction since August 2017, but is nearly a year behind schedule as a result of delays in obtaining land and permit approvals. Peter van der Waart, who was overseeing 16 public-private-partnerships for Meridiam before taking the reins at Purple Line, was brought in, demonstrating the commitment of Meridiam to finding solutions. His skill and experience in managing PPPs and relationships between clients and contractors will bring value. The focus now is on removing any last obstacles in order to push the project through to completion, with the target of opening for service at the end of 2022.

What role does ESG play within your asset management strategy and how has your approach to these issues evolved?

ESG has always been integrated into our investment and asset management processes throughout the lifecycle of any project since the inception of Meridiam 15 years ago. We set standards, but also goals, in terms of what we want to achieve from an environmental, social and governance perspective. But where ESG used to be more about risk management and engagement with stakeholders, four years ago we introduced a UN Sustainable Development Goals-based methodology to actually measure positive impact as well. Again, we apply the SDGs throughout the life of the investment or a portfolio. This approach helps us select projects that create better impact. It also helps reduce volatility in the relationships with stakeholders, and the public sector, based on real data and hard facts.

Have expanding investment parameters within infrastructure changed the demands on asset management?

Some sectors have become an established part of infrastructure investment over the course of the past decade. I am thinking of energy transition, in particular, which tends to involve smaller projects, or platforms of projects, and that requires additional work in terms of acquisition and then importantly integration. It is a new way of investing and has brought a new approach to asset management promoting the development of Meridiam as a network.

How do you manage risk through asset management? How do you make sure you are anticipating problems before it’s too late?

That is all about day-to-day management and why it is so important to have people on the ground. Quarterly or yearly boards are not enough to anticipate difficulties. It is also important to engage frequently with your counterparties because they may be a source of tension at one point or another. Then you need to make sure that the service you are providing is top-notch – that you are meeting your minimum contract requirements and hopefully exceeding them. All of these are ways to anticipate trouble and see it off.

To what extent are infrastructure investors differentiating themselves through their approach to asset management, in terms of fundraising, but also winning auctions? And has this changed?

From a fundraising perspective, I think LPs do differentiate based on asset management capacity, but it really depends on the investment horizon. If you are looking at more of a private equity-style infrastructure fund, with assets being bought and sold every three or four years, then I don’t think investors pay too much attention to asset management strategy but more to short-term value creation. But if you are going to be holding assets for 25 years, then the nature of that commitment means that asset management skills become incredibly important. LPs will focus heavily on your asset management resources and processes. They will want to touch the cloth to see if it is real.

For auctions, whether it is to acquire an asset or to purchase part of a portfolio – something we see more frequently due to the 25-year life of our funds – good asset management is essential to identify the potential upsides that could be reasonably delivered. Investors would then integrate those to pay a premium and be more competitive.

Given the increasingly competitive landscape and the asset management skill required, would you say that infrastructure as an asset class offers a compelling risk return proposition?

The promise is clear. But the delivery depends on whether that active asset management is real.

How do you expect the industry’s approach to asset management to evolve over the next 10 years?

I think hands-on asset management will increasingly become essential. There is so much external volatility that can impact assets that if you are not in active asset management mode it will be very difficult to survive. We already see this with assets that are sensitive to climate risk, for example. This is not a challenge for tomorrow. Strong asset management is necessary today.

Miami Access Tunnel: boosting local communities

Operation 305 – named after the local telephone code for the 2.7 million residents of Miami-Dade County in Florida where the Miami Access Tunnel development project took place – was the name given to the recruitment and local procurement drive established with the aim of providing employment to as many locals as possible as the $900 million project got underway.

The project was launched at a difficult time for the city and surrounding area. Construction began in 2010 when the financial crisis was biting hard. Unemployment was high and public feeling towards the county authorities was at rock bottom after public money was used to build a new stadium for local baseball team, the Miami Marlins. As a result, the Miami Access Tunnel project was facing a 68 percent unfavourable rating at the outset.

With all this in mind, Operation 305 was launched as a project-wide initiative. The objective was to hire as many local people as possible, as well as creating a racially diverse workforce that reflected the demographics of the county. This was done through targeted recruitment programmes, including multiple job fairs and specific campaigns focused on the war veteran community. Applicants were pre-screened by their address before being sent to contractors for consideration.

Principal contractor Bouygues was fully committed to the initiative. All other contractors were sent a mission statement and were incentivised, in part, in line with the degree to which they took up the ethos of Operation 305. A project procurement framework, meanwhile, set out the terms for local businesses to get involved and a partnership with the Miami-Dade County Small Business Development Office was forged to help local SMEs from within disadvantaged communities get involved.

In total, 831 different companies worked on the Miami Access Tunnel. More than half, 465, were Miami-Dade businesses. Around $325 million of the construction investment was spent through them, providing a major boost to the local economy and community. In total, it is estimated that close to 7,000 people worked on the tunnel construction project throughout the supply chain. Around 85 percent were local residents.

Thierry Déau is Meridiam’s chairman and chief executive officer. He previously worked for France’s Caisse des Dépôts et Consignations