53
may
2014
infrastructure
investor
SPECIAL FEATURE
exposure simultaneously, there is likely to
be volatility in share prices for a prolonged
period and there is very little action that
companies will be able to take. What they
can do is continue to educate investors in
advance about their valuations and likely
future performance characteristics in dif-
ferent economic environments.
SUPPLY OF INVESTMENT
OPPORTUNITIES
Secondary investing inPPP/PFI infrastruc-
ture was, until recently, largely the preserve
of specialist fund managers, well versed in
the sector’s development and contractual
nuances. The listed investment companies
had been able to take advantage of their
manager’s expertise to source investments.
Typically the sellers of these investments
were a mixture of banks selling non-core
assets, construction companies recycling
capital for new investments and primary
infrastructure investors taking profits after
the completion of construction.
Over the past few years, there has been
a consistent supply of assets fromthird-party
sellers to the listed infrastructure compa-
nies, especially minority stakes in projects
they already owned. The nature of the
dynamics of the market has enabled the
buyers of secondary PPP/PFI assets tomain-
tainpricing discipline while also deploying
the capital raised in the listed market.
The supply and demand market
dynamic for secondary PPP/PFI project
assets has, however, changed significantly
over the past year or so. The strong returns
and the more established track record of
the asset class have attracted more capital
to the space, largely from institutions (pen-
sion funds and insurancecompanies), which,
directly or indirectly, have invested through
the launchof newprivate investment funds.
The increasedcompetition for assets has put
pressure on pricing, especially where port-
folio sales are conducted through auctions.
At the same time, the supply of assets
from the most motivated sellers (those
with pressure on their balance sheets post-
financial crisis) has been gradually worked
through and the slowdown innewPPP/PFI
deals being closedhas started to impact on
operational project deal flow in the second-
ary market. Recent commentary and anec-
dotal evidence suggests that pricing, espe-
cially in theUK, has increased considerably.
While this is positive for current valuations,
it is provinghard for investment companies
to make non-dilutive acquisitions.
The lack of transparency on the pric-
ing of new transactions, not just limited to
the discount rate but the conservativeness
(or otherwise) of the assumptions on cash
flows, means that it is hard for investors
in the listed companies to judge whether
acquisitions are in their continued interests.
Independent boards of directors need to
ensure that companies do not grow for the
sake of assets undermanagement (and the
additional fees paid to the investmentman-
ager) at the cost of future performance.
The other risk is that companies
broaden their investment remits to main-
tain returns by investing in riskier parts
of the infrastructure universe. Investment
manager skill sets and deal flow may be
less established in some of these areas and
the resulting blended portfolio may dem-
onstrate different return characteristics
compared with a pure PPP/PFI portfolio.
FINE LINES OF DIFFERENTIATION
In a period of consistently strong perfor-
mance and plentiful supply of new assets,
investors did not need to distinguish
between companies in the peer group. In
the evolving tighter environment, differ-
ences between companies become much
more important. This has resulted in a
greater degree of focus on total expenses,
deal flow, corporate governance, foreign
currency exposure and portfolio risks.
Companies are gradually responding
to the greater degree of scrutiny of valua-
tion assumptions, including life-cycle costs,
construction asset premiums, discount rates
and cashflow timing assumptions. Investors
are challenging investment managers on
related-party fees, special purpose vehicle
(SPV) director fees and the terms of related-
party transactions.
In an asset class where it can takemany
years to see the performance differences
from investment decisions, investors are
having to base their assessments on man-
agers’ and companies’ approaches. Compa-
nies that wish to continue growing need to
be able todemonstrate that they can source
attractive deals andprovide sufficient trans-
parency around these transactions and the
existing portfolio.
n
Tom Skinner
is head of research at Dexion Capital,
the London-based boutique investment bank
Name
Ticker Launch
Market
cap (£m)
Manager
Focus
Bilfinger Berger Global
Infrastructure
BBGI
21/11/2011 502
Internal
Minority UK exposure; currently highest construction exposure;
internally managed; youngest and smallest company
HICL Infrastructure
HICL 29/03/2006 1660
InfraRed
Largest and most established company; almost wholly third-party
acquisitions; highest UK exposure
International Public Partnerships INPP 08/11/2006 970
Amber
Infrastructure
Significant non-UK exposure; historically had meaningful construction
and non-traditional PPP exposure; highest fees
John Laing Infrastructure Fund JLIF 29/11/2010 889
John Laing Capital
Management
Pipeline agreement with John Laing; high UK exposure
THE LONDON LISTED PPP INFRASTRUCTURE EQUITY UNIVERSE
Source
: Dexion Capital
