From airports to data, digital and debt

The scale of financing and the returns on offer from infrastructure have led to sea change in the way that these projects come to life. While banks still provide advisory services and almost always the initial bridge and hedging, they continue to step aside for equity and now debt funds eager to fill up on yields unavailable elsewhere.

Entering the project world in the early 2000s by buying assets, funds were more dedicated to increasing the value of businesses and investing in growth, putting in efficiencies and de-risking them to the extent that could be sold to sovereign wealth funds as good, long-term investments.

Things really started to get going in 2006 with sophisticated pension funds, particularly Canadian, piling into UK assets, said Andrew Landon-Green, Head of infrastructure fund coverage at Societe Generale in London. Whereas it used to be airports, toll roads and sometimes pipelines, things have changed quite a lot and now include data centres and fibre or digital infrastructure. This looks set to continue, particularly since the Covid-19 crisis, when so many are working at home and storing information on servers. That has become increasingly important and resilient and stood these funds in good stead.

While ticket sizes in the early days were generally between US$50 million-$100 million, a level that is still common, infrastructure fund managers like Global Infrastructure Partners (GIP) started life with about $6 billion for a flagship fund that is now at $22 billion.

That figure increases further with their co-investment club: they need to spend up to about $30 billion over the next five years, so their tickets need to be $4 billion-$5 billion a time or they can’t get the money out quick enough, said Mr Landon-Green.

The future is working from home

Airtunk in Australia and its hyperscale (extra-large) data centres is one of latest examples, with deals of a similar style popping up in the UK. The trend for these funds to invest in data projects has emerged alongside another, with funds that were just buying assets, in some cases, acquiring whole businesses, with recent examples seeing Macquarie Capital buying Kingston Communications in the UK and TDC in Denmark or Brookfield and Infratil buying Vodafone New Zealand.
Furthermore, just over a year ago, the financing of Cityfibre in the UK, acquired by Goldman Sachs and Antin Infrastructure Partners, proved to be a massive success in the face of the challenge of putting a large amount of money down on a multi-billion investment pipeline of assets rather than something that was already built.

We are staking our belief on their getting the go-ahead and doing what they say they have done rather than seeing the assets working and doing the due diligence that way,said Mr Landon-Green. At the same time, opportunities such as this provide the opportunity to create jobs and stimulate the economy.

Other examples include Antin’s purchase of Firstlight, whereby the French fund acquired the fiber-optic bandwidth infrastructure services provider operating in the Northeast US from Oak Hill Capital Partners IV.

In most cases, these funds are taking majority positions and managing them, said Mr Landon-Green. Refinancings have been undertaken to improve some of the original terms.

Taking on debt

There is more, with some of the most experienced funds introducing infrastructure debt alongside equity, with larger players, like GIP and IFM Investors, building up infrastructure debt funds that may or may not invest in projects that they would look at on the equity side.

Coming to the fore during the Global Financial Crisis where banks pulled back, debt funds work in a very similar way to banks, to the extent that they can verge on being competitors. Created with money from institutional investors, such as pension funds and insurance companies, which act as limited partners in a fund, these funds look to invest in high quality infrastructure deals over a longer investment horizon of around seven years. While the entry point had once been at refinancing, relying on the banks to do the initial financing and then taking them out, these funds are become more comfortable staking their claim from the outset. In these cases, the more developed general partners lacing these funds together may look at investing in either the equity or, if they prefer the risk-return, the debt.

As an alternative, equity funds buy up debt which they later convert to equity, as was the case of Macquarie with the UK’s M6 Motorway: the bank-owned project was in a distressed state, effectively controlled by banks. Funds such as Macquarie and IFM Investors effectively bought stakes from the banks, allowing them to stabilise and dramatically reduce the leverage of the business.

That’s the other role these funds play, coming into over-levered LBOs, de-risking them and making them much safer and attractive for the long term, said Mr Landon-Green.

As well as continuing to fulfil the need for upfront financing and underwriting the syndication of debt, the advisory role that banks have played runs alongside their increasingly important expertise in hedging. Further to managing and advising funds on interest rate and currency risk, Societe Generale has been at the forefront of the development of contingent hedging, which covers local regulatory risk between the agreement and completion of deals.
Banks also continue to fulfill their critical role on striking deals, acting as an intermediary for equity funds.

We are either on the sales side, where we have the corporate relationships, or on the buyside, using the bank’s expertise to advise funds on buying these assets where we have an angle, said Mr Landon-Green.

Carbon copies

The fund money is also eager to buy into projects based on environmental and social governance, or ESG, and relating to hydrogen and carbon capture as investors seek to neutralise the carbon they have in their portfolios.

There is a lot of thinking although not many bankable opportunities, said Mr Landon-Green. We are having discussions based on deals that will come over the next few years. Clients are interested, and we will see the next flood of money going into ESG, for example, battery storage, carbon capture and hydrogen.