Proof of concept

When I sat down with Marc Bajer, the founder of Hadrian’s Wall Capital, in May 2010 he told me he expected his pioneering subordinated debt fund to reach a €200 million first close that summer.

Fast forward two years and the Aviva Investors Hadrian Capital Fund 1 has finally hit that milestone on £160 million (€199 million; $250 million) – roughly the same amount Bajer mentioned (albeit raised in a different currency), but having been raised over a vastly more dilated time span.

It’s little surprise, then, that the first question I had for Bajer when we again sat down this June was: what took you so long?

“When you have a market transforming event like the credit crisis the market will tend to dictate what the solution needs to be going forward,” Bajer begins.

“However, somebody still has to put their hand up and try to make it happen and take all the risks – the risk of failing, the monetary risk, someone has to take all those risks.”

“You then have a lot of convincing to do,” he continues. “You have to convince institutional investors that they should be participants in the creation of a new asset class. Then you have to convince investors to invest in your fund – I’m surprised it took only two-and-a-half years. I thought it was going to take me two years longer,” Bajer says, defiantly.

He has a point. It’s true that in the time Hadrian’s Wall took to reach its £160 million first close many other debt funds have surfaced. Some, like Australia’s Westbourne Capital, have even gone on
to raise impressive amounts of capital.

But Hadrian’s Wall was never intended as a regular debt fund. It is intended as a catalyst that will bring the capital markets – and with it long-term funding – back into the mainstream of infrastructure financing – no small feat following the demise of the monoline insurers.

It aims to do this by using the money raised from investors to credit-enhance infrastructure bonds into A-rating territory by providing subordinated debt positions within senior-ranking infrastructure bonds.

If all goes well, Hadrian’s Wall plans to raise £500 million and €500 million – though the split between
the two currencies may be adjusted. That total could, in turn, catalyse some £/€10 billion of infrastructure deals.

But before it has a chance to hit the £/€1 billion mark, potential limited partners require proof of concept.

“I would have to say the main issue that has been raised by investors over the last two years is: Are you sure it’s going to work out? Well, then, show us. And you know what? That’s exactly what investors
are supposed to do – they are supposed to be careful,” Bajer argues. “So I can understand that institutional investors want to see deals happen – they want proof of concept,” he adds.

That certainly explains why two of the three investors that backed Hadrian’s Wall’s first close – the European Investment Bank (EIB) and the Development Bank of Japan – are multilaterals, as opposed to traditional institutional investors.

Still, when I ask him, Bajer isn’t persuaded by the idea that the Hadrian’s Wall concept is perhaps a bit too complex for traditional LPs.

“We are not reinventing the wheel here. What we are doing is taking some old technology and re-applying it to a new asset class. So I wouldn’t have thought that it’s more complicated than all the other assets that use similar technologies. But when you’re applying that technology to a new asset class, then
everybody is a bit mystified,” he concedes.

WHEN MARC MET AVIVA

One investor which was certainly not mystified by the Hadrian’s Wall concept was Aviva Investors, the asset management arm of insurance group Aviva. In fact, to hear Bajer describe it, it seems like it was love at first sight for the two firms.

“Aviva Investors was actively pursuing an infrastructure debt strategy when we were pursuing ours. Our interests happened to have coincided and when we had our first meeting back in September 2009 the concept we were promoting was what they were looking for. I definitely pitched to them what our strategy was and they then pitched to me their fund management role, which I thought was a fantastic thing for us and we agreed how the relationship would work,” Bajer explained.

That led to the current arrangement, where Aviva Investors acts as the fund manager – responsible for relations with current investors, marketing and bringing in new capital – and Bajer’s Hadrian’s Wall Capital originates and executes deals and provides monitoring and surveillance services to the fund investors and the investors which buy Hadrian’s Wall’s bonds.

And then, of course, there is the EIB.

If imitation is the sincerest form of flattery, then Bajer should feel very flattered indeed. Not only did the EIB buy into the Hadrian’s Wall concept enough to be one of the fund’s first investors, it
liked the concept so much it decided to openly emulate it.

After all, the EIB’s project bond initiative is, as Bajer put it, “identical” to what Hadrian’s Wall is doing. The only difference is that the EIB can provide either a funded or unfunded subordinated debt tranche, whereas Hadrian’s Wall will always fund the tranche.

WAITING ON A FIRST DEAL

Returning to Bajer’s proof of concept remark, what will Hadrian’s Wall’s first deal look like? And perhaps more importantly, when is it going to happen?

“There are still a large number of transactions out there requiring financing,” Bajer points out.

“I wouldn’t like to bet on what the first project we close will be, but I think it’s fair to say there is a strong emphasis on demonstrating execution capability, so that places a premium on deals we can
do quickly. I would think a refinancing would come first just because there are a number of such processes taking place in the UK over the next few months,” he added.

There aren’t many limits to the type of deal Hadrian’s Wall can do – although Bajer points out he’s not too keen on greenfield volume risk. But whether it’s a primary or secondary deal, you can be sure of one thing: Hadrian’s Wall’s first deal is going to showcase the competitive advantages of long-term financing.

“I challenge you to produce a bank that is going to provide a 35-year fixed rate deal in today’s market,” Bajer says.

“There is huge value in having longer tenor and taking 100 percent of the refinancing risk off the table. Our argument is that on anything approaching an equal price [between bank debt and
the Hadrian’s Wall solution], a 30-year fixed rated deal is going to be much better than a 10-year fixed-rate deal,” he emphasises.

That’s always been the obvious strength of the Hadrian’s Wall proposal: the tantalising promise of a return to asset-matching long-term funding and the disappearance of refinancing risk – even if these perks will never be priced as low as bank debt circa 2007.

Now all Hadrian’s Wall needs is some momentum.

“I want to create a new market,” Bajer stresses. “I don’t want it to be just me – I want it to be 10 other guys, globally, doing what we are doing in five years’ time. This industry needs a global
investor-based debt financing market.

And that doesn’t really happen with a bilateral lending fund approach. We are going to facilitate access to a vast reservoir of long-duration money through fixed-income transactions that trade, that are liquid, and where you can have a deep and wide market to do deals.

That is fundamentally what the industry needs,” he concludes.