Considering UBS Asset Management’s infrastructure unit has been around since 2007 – its first unlisted equity fund closed the following year on $1.5 billion – you could reasonably expect it to be more of a household name.
Compare it with Antin Infrastructure Partners, another European manager that started life in 2007 (also tied to a bank, BNP Paribas), and the differences come into sharp relief: Antin is one of the European market’s most well-known, independent managers, with over €7 billion in assets under management, gearing up to raise as much as €6 billion for its latest fund. UBS has about $5 billion of AUM, has just closed its second debt fund on its €1 billion hard-cap and is getting ready to raise its third equity offering, said to be targeting about $1 billion (the firm wouldn’t comment on the latter).
The point here is not that bigger is necessarily better – there are perfectly valid reasons for staying small. But here’s the thing: UBS wants to be bigger. As Thomas Wels, head of real estate and private markets (which includes infrastructure), told sister publication PERE in early 2017, he sees the firm’s direct infrastructure capability as a $10 billion business.
Given UBS’s early start, why isn’t it one already? “The infrastructure platform has, for many years, been sub-scale, under-invested [in] and thus lost contact with its investors,” offers head of infrastructure Tommaso Albanese.
His clear-headed diagnosis is not just bluntness. Having joined UBS in 2010 as vice-chairman of global capital markets, Albanese was put in charge of the infrastructure unit in late 2016, at the same time the real estate and private markets business was established. His mission: to turn the ship around and steer it in the direction of that $10 billion AUM target (though he cautiously declines to state when he expects to achieve it).
This is the story of that ongoing realignment.
Lessons from infra debt
To understand what Albanese is trying to achieve with UBS’s direct infrastructure platform – which in addition to the global equity and European debt offerings, also includes two Swiss clean energy funds – you have to understand what he did in the infrastructure debt market.
Albanese is a capital-markets veteran, with a 15-year stint at Morgan Stanley under his belt, where he left as global co-head of capital markets. He has also been adjunct professor at NYU Stern School of Business, where he teaches infrastructure finance, for 10 years.
“I see fast raises with pressure to deploy capital before the market changes. We’re positioning ourselves slightly differently; we don’t want to be in that game.” Albanese
That’s another way of saying that he’s been thinking about infrastructure debt for a long time. In the asset class’s youth, “I was asking myself how there could be so much interest to bid for UK utilities at a higher-than-RAB value. I was also wondering how there could be so much interest in bidding for the early US toll roads at, say, double their selling price. In other words, I was thinking up to what point one could add value by inserting leverage in infrastructure assets.
“More recently, I was puzzled at how private debt was not flowing through the economy to meet the needs of the infrastructure sector, despite increasing demand from institutional investors. I thought there was a need for a solution to better connect borrowers and investors in infrastructure debt.”
Albanese’s solution was the Archmore Infrastructure Debt Platform, a senior-secured focused debt fund that he established in 2014 and steered to a €570 million final close in 2016. That fund was quickly deployed across 12 investments and is now generating a gross return of 3.8 percent. More importantly, Archmore was UBS’s way of re-connecting with investors, creating a product that better suited their needs.
Like other players in the debt space, Albanese recognised the opportunity in regulation. “The introduction of Solvency II for European insurers has brought new constraints, but also recognised the infrastructure sector as low risk and thus reduced the respective capital requirements [for insurers]. We have been at the forefront of developing regulatory friendly fund strategies that satisfy the local investor requirement.”
The latter involved working closely with investors on everything from reporting requirements to sub-fund structures. And while it’s clear a significant proportion of UBS’s debt clients are insurance companies, Albanese has an eye on the European pension fund market.
“While pension regulation is behind insurance regulation, it’s moving towards risk-based allocation versus quantitative-limits allocation. Typically, southern Europe is more quantitative focused whereas northern Europe has moved more towards a risk-based allocation. The fact that we can provide look-through investment data means we could make those investments qualify for a reduction of capital, which made the opportunity more interesting.”
The other leg of UBS’s debt strategy – which helps explain that robust 3.8 percent return on senior-secured debt – can be found in the deal sourcing. “We invest opportunistically in issuer and deal types where access to capital is more difficult and drives higher returns,” Albanese explains.
That means focusing on the mid-market – Archmore II is looking at ticket sizes between €30 million and €150 million – and staying away from bank-originated debt.
“Banks are the typical providers of assets but they tend to focus on recurring business, where their credit department knows the risks well so they can do volume. These assets typically come from construction companies or are mainstream assets with typical risks. There’s another part of the market which has had more trouble getting capital from the public and banking sectors. This is where we saw an interesting opportunity to do more work, requiring more credit analysis and structuring,” Albanese says.
The latter included setting up its own ratings system. “Instead of trying to get companies rated, we have investor-driven ratings. So, I asked Moody’s to spend six months setting up their own analytics software, which basically allows us to rate [our counterparties],” he adds.
By this point, you will have picked up that UBS’s debt platform focuses exclusively on senior debt within Europe. When asked why the manager isn’t targeting junior debt, an increasingly popular segment of the market, Albanese answers:
“Junior is for different types of investors. Our typical insurer investor and regulated pension [fund investor] like conservative. Also, subordinated debt has higher capital requirements. If you can structure something that is senior, giving you 4 percent [returns] with a 20 percent capital requirement – instead of 40 percent [for junior debt] – you get quite a nice risk-adjusted return.”
But as UBS lays the groundwork for the launch of a US debt fund, following the hire of Vanessa Lamort De Gail, who joined as a portfolio manager from Deutsche Bank, that might change. Albanese explains US debt was always part of the plan, but the spread gap created by quantitative easing made Europe a priority. Recognising the US is different, he admits “there may be space for more subordinated-type debt”.
Walk on the conservative side
With the positive debt experience giving a jolt to the wider infrastructure platform, Albanese is about to turn his attention to equity, where UBS’s infrastructure business began. Unsurprisingly, he’s doubling down on some of the elements that worked so well in debt – a focus on proprietary, complex mid-market transactions; investor-friendly structures; and traditional infrastructure assets.
“In infrastructure equity, I think there has been a trend of strategic repositioning towards more risk to get higher returns,” Albanese offers.
“These strategies rely mainly on capital gains after an asset is sold. This drift has been happening over the last several years. Looking at the valuations in this advanced stage of the cycle and with increased volatility in the listed equity markets, we feel that a capital-appreciation strategy could come under pressure. Instead, we prefer income-based strategies with a more conservative IRR but with a higher cash yield that is distributed year after year.”
He continues: “We don’t subscribe to the nomenclature of core, core-plus, and so on, but seek stable cashflows from essential assets with low correlation and inflation protection. Having a higher cash yield makes us less reliant on the exit to achieve returns. Therefore, to us it’s more important how the fundamentals of a business can generate those cashflow streams than the supply/demand of market cycles. Again, there is a segment of investors that wants this kind of strategy. It doesn’t work for everybody but we have our convictions,” Albanese concludes.
The manager’s $644 million second equity fund offers a good blueprint, generating a lifetime IRR of about 10 percent but with a cash yield of more than 8 percent.
But even when the going gets tough – such as with UBS’s storied investment in Gassled, Norway’s central gas pipeline system, where the government implemented draconian tariff cuts – UBS tries to maintain that discipline.
“Gassled was the first divestment from Fund I and we locked in a 14 percent IRR. But, importantly, it was realised mainly through dividend distributions over the life of the fund – not on the exit.”
One element Albanese plans to change in the equity strategy is to seek either majority positions or to be one of the largest investors in any given asset. “We want to get involved in the management of the assets. For example, I have set up a team of advisors – people with experience in managing infrastructure companies – that can help us with the asset management.”
So, just over two years into Albanese’s tenure, where is UBS?
It’s undeniable that progress has been made. Over the last couple years, the manager has increased the speed of capital deployment, with 16 deals done; hired 10 investment professionals, including Macquarie Infrastructure and Real Assets veteran Perry Offutt to lead its American infrastructure unit, bringing the overall team to 40; and launched a second Swiss clean energy fund, in addition to its recently closed sophomore debt vehicle. The latter enjoyed a re-up rate of more than 70 percent, vindicating Albanese’s strategy of bringing the manager’s products closer to investors.
“UBS is part of a small number of global active managers – like iCON Infrastructure, DWS, Basalt and DIF – that focus on traditional, mid-market assets. We are different from a larger group of big funds that have drifted towards private equity and large-cap deals, the EQTs and Global Infrastructure Partners of this world,” Albanese says.
With the pieces of its revamped offering falling into in place, it remains to be seen whether a larger number of investors will take to it.
Albanese sounds quietly confident: “I see fast raises with pressure to deploy capital before the market changes. We’re positioning ourselves slightly differently; we don’t want to be in that game.”