There have not been too many times over the past 12 months where people looked fondly at the public markets. As you read this, we are just a few weeks after the one-year anniversary of 9 March’s Black Monday, as stock markets around the world endured their worst day since 2008 in response to the outbreak of covid-19, with volatility being the market’s main theme since.

However, this volatility has not deterred infrastructure managers, who are increasingly finding joy in the public markets in their quest for deals, with 2020 marking a doubling in the number of such transactions.

Part of this is a mirroring of what is occurring in the wider private equity sector. In the UK alone, the total value of UK-listed companies taken private increased from £2.3 billion ($3.2 billion; €2.7 billion) in 2019 to £21.1 billion in 2020, according to accountancy group BDO.

Infrastructure funds are increasingly at the forefront of this trend and it was the London Stock Exchange which, at the end of 2020 and beginning of 2021, played host to the bidding war between Blackstone and Global Infrastructure Partners for private aviation group Signature Aviation. The pair eventually agreed a joint bid in February worth $4.7 billion, a 53 percent premium on the company’s pre-bidding share price and “one of the largest bid premiums for a public-to-private deal on the London stock market”, according to The Times.

Blackstone is no stranger to such transactions, completing a deal to take US-based midstream company Tallgrass Energy private in 2020, having initially bought a 44 percent stake in the group in 2019. At the time of writing, the firm is also close to completing a deal for London and Dublin-listed motorway services operator Applegreen, in a deal worth more than €700 million.

“It is the natural evolution of the infrastructure market that more and more of these businesses are publicly-traded,” says Sean Klimczak, chief executive of Blackstone Infrastructure Partners. “As a result, there is now a deep enough public market such that public-to-private deals will be done with increasing frequency.”

There is also the factor of the amount of capital available to invest in infrastructure, which has inevitably drawn managers away from pure private-to-private deal making.

“There’s only so many of these assets,” says David Bentley, partner at listed fund manager ATLAS Infrastructure, who adds that most take-private deals are on the periphery of what he sees as his core infrastructure investment universe. “It makes sense the listed infrastructure market is where they might focus some of their attention.”

Covid comes calling

While Klimczak and Bentley’s reasonings were relevant as this trend increased before the coronavirus outbreak, the aforementioned stock market crash has provided a significant additional rationale for pursuing such deals.

For managers, prices are at a lower end of the market than they were previously, while even for shareholders of companies which have not been among the worst affected by the crisis, take-privates offer an opportunity to escape the volatility of stock exchanges.

“We were cautious on the transportation sector pre-covid because we thought valuations were priced to perfection. However, we view the current dislocation as temporary,” says Klimczak, although Blackstone had first approached Signature Aviation in February 2020. “We believe these structurally attractive and growing sectors will equilibrate and get back to more normalised levels over the course of the next year.”

“We believe these structurally attractive and growing sectors will equilibrate and get back to more normalised levels over the course of the next year”

Sean Klimczak
Blackstone Infrastructure Partners

Blackstone’s open-ended fund structure allows it to take an approach like this, but this will not be the case across the infrastructure market. Others see take-private deals happening across sectors more akin to what is seen as favourable in private markets too. Last month, Macquarie Infrastructure and Real Assets, in partnership with Aware Super, agreed a A$4.6 billion ($3.5 billion; €3 billion) takeover of the Australian-listed fibre group Vocus.

“I think these deals are certainly on the increase, particularly within power and renewables,” adds Simon Barnes, a Sydney-based managing director in Rothschild & Co’s utilities, transport and infrastructure team who has advised on many deals in the past five years. “In Australia, there have been several high-profile take-private deals, with only a couple of renewables companies of any meaningful size now left on the Australian Stock Exchange.”

Nevertheless, sources still point to a covid-related increase in take-private deals, with sectors such as midstream energy piquing interests. Brookfield Infrastructure Partners, for example, made a C$7.1 billion ($5.7 billion; €4.8 billion) offer in February for Toronto-listed Inter Pipeline, owner of over 7,000km of oil and gas pipelines. Inter Pipeline was unimpressed with the bid, urging shareholders to reject the approach as “it does not reflect fair and full value” of the company. Brookfield, for its part, stood by its offer, maintaining in a statement that it could bring value to “a security that has significantly underperformed in the public equity markets”.

While Inter Pipeline was unmoved, covid’s effect on sectors such as midstream and the wider stock market has provided potentially favourable takeover conditions for assets in sectors either “cyclically depressed or structurally unloved”, as Klimczak puts it.

“Some sectors have fallen out of favour as people figure out the long-term implications for different sectors coming out of the crisis,” adds Christoph Oppenauer, managing director at Morgan Stanley Infrastructure Partners. “This could lead to an increase in situations where you can find attractive value.”

The public-private disconnect

Beyond the opportunities presented by covid-induced valuations, some point to a more general disconnect between public and private market valuations, which can present opportunities for infrastructure investors. Indeed, research last year by listed infrastructure manager 4d Infrastructure on transactions between 2015 and 2020 showed what it said were the “vast majority” of private transactions traded at EBITDA multiples at the higher end of those seen in the listed market, although data from EDHECinfra suggests including other factors changes this picture somewhat.

“Public market investors often use multiple-based valuations and forecasts of three to five years, while private infrastructure investors rely more on DCF-based valuations and have an investment horizon of 10 years or more,” adds Matteo Botto-Poala, a managing director at Goldman Sachs’ infrastructure investment division, which in 2018 paid £537.8 million alongside Antin Infrastructure Partners to delist UK-based CityFibre. Goldman Sachs is also in the process, alongside BlackRock, of acquiring London-listed smart metering company Calisen.

“For businesses which have a lot of growth potential, that translates into better numbers,” he adds.

Analysing listed assets with a slightly longer-term lens has also been a boon for Oppenauer at Morgan Stanley. The firm has been particularly active in Germany, taking rail logistics group VTG private in 2019, before also making approaches for renewables developer PNE and fibre operator Tele Columbus, the latter of which is an ongoing transaction at the time of writing.

“In general, public markets are pretty good at pricing assets, but sometimes we feel you find these rare situations, perhaps with smaller, marginal assets in the main indices, where from our perspective, the public markets are undervalued and therefore provide a better value than what you can find in the private markets,” believes Oppenauer. “Given that we look at these assets from a long-term perspective rather than the next quarter or 12 months, that can also explain the valuation difference.”

The delisting of somewhat smaller assets, as described by Oppenauer, may well explain why Bentley sees little effect of assets disappearing from the listed market, with notable exceptions such as Brookfield and GIC’s $8.4 billion acquisition of US-based railway group Genesee & Wyoming in 2019.

“Many of the private market players can’t afford the take-private premiums,” Bentley explains. “A lot of transportation assets have government cornerstone stakes, which means they can’t be taken out. A lot of the US utilities and rail companies are just physically too big.”

Bentley’s viewpoint is also an effect of the continued broadening definition of infrastructure, a theme which has initially played out in the private markets but is now also coming to dictate some of the public-to-private transactions.

“That overlap between private equity and core-plus infrastructure is growing, with funds increasingly willing to bid for companies that demonstrate infra-like characteristics,” argues Barnes.

One of those private equity-style investors is Pacific Equity Partners, which has built up the portfolio in its Secure Assets Fund, its inaugural infrastructure vehicle, through a series of take-privates and corporate carve-outs from listed companies – an area it is well-versed in from its private equity history.

“There are increasing amounts of capital chasing opportunities, whether in the traditional buyout or infra worlds. As privatisations dry up, people are looking to other areas,” says Andrew Charlier, a managing director at PEP. “But it’s important to note that public-to-privates are complex and it will be interesting to see how buyers that come from a more certain world cope in that environment.”‘

More ‘conducive’ ownership

The infrastructure-style investors certainly believe they can cope, or provide an even better alternative. One theme common among either current management or prospective new owners in bid documentation for take-private deals is the belief that given the nature of the business, private ownership is the more appropriate model.

For infrastructure deals, this has been quite typical for either greenfield businesses or companies set to undergo large capital-intensive spending programmes. In the aforementioned Calisen and Applegreen transactions being pursued by Goldman Sachs and Blackstone respectively, both parties outlined their expansion programmes for the businesses and how these would be better served by private ownership.

“It doesn’t make sense, in our view, for investors to be paying private equity-style management fees and just have assets run by decent management teams”

David Bentley
ATLAS Infrastructure

Additionally, following the agreement by Macquarie and Aware Super for Vocus, Kevin Russell, the company’s managing director, told the Sydney Morning Herald the deal “gives us a bit more flexibility to invest strategically, without the scrutiny of short-term targets” and “a private company is more conducive to making these

So, what are private owners bringing that makes their model of ownership that much more advantageous? First, it’s a significantly different way of accessing capital.

“When you spend capex and the business is still relatively small, the cashflows of the business may not be enough to fund sufficient investments,” reasons Botto-Poala. “You will require both additional equity and debt capital and for the public markets, that can be a source of concern and impact the share price. A private investor can take a long-term view, provide more capital if needed and be a strategic partner for the business.”

Oppenauer adds: “In a sector where you have a transformation or a repositioning going on, it would be suitable to do that in a privately-backed setup.”

Essentially, accessing the deep pockets of a private markets asset manager is a lot easier than turning to what can, at times, be a fickle public market, says one source. However, for Bentley, this ultimately boils down to what the different roles of listed and unlisted managers are and what is expected of them by investors.

“It doesn’t make sense, in our view, for investors to be paying private equity-style management fees and just have assets run by decent management teams,” he says. “The private equity funds are doing things they should be doing, which is buying assets where they can add value and grow.”

In Australia though, recent moves in the market have seen the rather more patient capital of investors such as superannuation funds weigh in.

In December 2020, AustralianSuper saw a NZ$5.4 billion ($3.8 billion; €3.2 billion) bid for infrastructure platform Infratil rejected, while a few weeks earlier, Aware Super made its first attempt at a solo take-private deal, bidding around A$675 million for fibre infrastructure business OptiComm. Aware Super also lost out, being outbid by another listed corporate in the digital infrastructure sector, Uniti.

But there are legitimate questions over whether superfunds have the capacity to complete these kinds of transactions. “A lot of them are still coming up the curve and gathering the deal team and skillsets necessary to initiate and lead such deals,” says law firm King & Wood Mallesons head of private equity Mark McNamara, who has advised on several take-private deals in the Australian infrastructure sector.

PEP’s Charlier says: “I think it will challenge some of these funds who aren’t used to the complexity of these businesses, as well as the complexity of the deal process itself. But given the amounts of capital available, I think we’ll see more transactions in this space, particularly at the large end.”

Stable and predictable? Not this time

So, if Charlier and co are right and this trend in infrastructure M&A is set to continue, what do managers need to keep in mind? For starters, they must be braced for uncertainty, despite it being the antithesis of what infrastructure GPs crave.

“There’s a huge amount that goes into these deals and they are difficult to get done,” warns McNamara. “If you’re a private equity sponsor, you traditionally go into a private deal with more risk protection and certainty built into the transaction; in take-privates you’re taking a bigger leap and exposing yourself to risks that you probably would seek to limit or eliminate in a private context.”

Part of that is the level of due diligence provided to potential buyers. Although there is plenty of public information on the targeted assets, this may not be at the same level private market actors become accustomed to when transacting on a bilateral basis.

“The complexity on a public-to-private is certainly higher than a private transaction. You need to have a lot of conviction up-front, you need to know the sectors very well and execute flawlessly,” says Goldman Sachs’ Botto-Poala.

Brookfield’s very public tête-à-tête with Inter Pipeline is one of the obvious risks should these transactions not be executed flawlessly. There is also the risk of being drawn into a public bidding war, as was the case with Blackstone and GIP for Signature.

PEP’s Charlier says a premature announcement can make deals more challenging for both the seller and the buyer.

“If you look at our portfolio and the deals we’ve done, almost all of them were done on a bilateral basis until they were announced with a certain price and all the diligence done. We’ve found that boards are quite receptive to that – there’s a preference, by and large, from boards to engage bilaterally,” he says.

This, though, can be easier said than done, with McNamara noting that the “ability to deal with things on a sensible timetable can evaporate very quickly”.

He says he has “never” worked with a deal sponsor who, when first to engage on a takeover, was happy that news of the transaction had leaked prior to a formal announcement. That, though, may be an occupational hazard for infrastructure GPs to increasingly deal with.