From a $5.64 billion first fund closed in 2008 to an $8.25 billion second fund wrapped up in October 2012, surely life has been plain sailing for New York-headquartered infrastructure fund manager Global Infrastructure Partners (GIP)? If you’re tempted to think that way, GIP managing partner and chairman Adebayo (“Bayo”) Ogunlesi is keen to disabuse you of the notion. Sitting in the firm’s East 49th Street office in Midtown, he insists that, from the get-go, nothing was ever taken for granted. How could it be? After all, GIP was a mould breaker, a challenge to what he frequently refers to as “received wisdom”.
For instance, prior to GIP’s debut fundraising, “a reasonably conservative approach to leverage” was a fairly unorthodox view on financing infrastructure assets, says Ogunlesi. He adds: “If you look at our portfolio companies, you’ll find that on average they are financed 50/50 debt/equity and we have a number of companies that have no net debt at all. Back in 2006 the idea was that you could put significant debt on these assets and there were even instances where infrastructure companies borrowed to pay dividends.”
It was also not the most mainstream of approaches to assemble a large team of operating professionals. Among its 80-strong team across its offices in New York, Stamford (Connecticut), London and Sydney, GIP has around 25 operational specialists. “It was not the general view that infrastructure businesses were supposed to be better run after the deal than before you bought them,” says Ogunlesi. “I think there was a phase when the attitude to infrastructure investing was ‘get it and forget it’ because these businesses manage themselves. Our view has always been that nothing could be further from the truth.”
‘Only a theory’
And then there’s the firm’s focus on just three sectors: energy, transport and waste/water. This did not go unquestioned, Ogunlesi insists. “When we were raising Fund I, people said ‘why are you only focusing on these three sectors? What about telecom towers [and various other things]?’. Our view was that we had to concentrate on those areas where we had decades of experience and relationships. But, in 2006, it was only a theory.”
It seems safe to say that the theory has worked out pretty well. $8.25 billion of investor commitments to Fund II is a powerful validator of the GIP concept. ‘A triumph of execution’ is how one of the firm’s backers describes its arrival at that number. Another investor told Infrastructure Investor: “It seems to us that the firm is the single largest concentration of intellectual firepower in the infrastructure space globally as well as being the only team that has really been serious about addressing operational improvements. Most teams outsource it or just don’t do it at all.”
A quote such as the one above demands a proviso: namely, that GIP still has questions to answer. One market source, for example, asks how successfully GIP will be able to put its new mountain of cash to work. Will it be able to find a home for all that capital with sufficient rapidity over the fund’s ten-year life (which can be extended to a maximum of 14 years with investor approval), while also ensuring its 15 to 20 percent internal rate of return (IRR) target is achieved?
One answer, if arguably a little trite, is that all those investors can’t be wrong. GIP’s second vehicle started out with a target of somewhere between $5 billion and $7 billion – and ended up as the largest infrastructure fund ever raised (previously this mark had been set at $6.5 billion by Goldman Sachs’ debut infrastructure fund in 2006). And even that final figure – achieved after obtaining investor permission to raise the hard cap from $7.5 billion – was a long way short of total demand.
“We certainly could have raised a larger fund but we didn’t feel compelled to do so,” says Ogunlesi. “It had to be an amount of money we felt comfortable investing.”
Another, perhaps more telling, insight into the firm’s ability to deploy capital is to refer back to the last time this publication conducted a keynote interview with Ogunlesi back in mid-2009. At the time, GIP still had 65 percent of the $5.64 billion first fund sitting idle, almost three years after its first investment in London City Airport. Our headline then captured the prevailing sentiment surrounding the fund: Patient – for now. There was a sense that, while there was no immediate urgency, the money was better invested sooner rather than later.
And yet, in the end, 2009 was the year that some see as a purple patch for GIP deals, with two much-lauded investments in the US (the Ruby natural gas pipeline and the Chesapeake Midstream Partners gas gathering joint venture) and the acquisition of the UK’s Gatwick Airport all completed during the second half of the year.
Moreover, if the responsibility of managing such a large fund might occasionally cause even the seemingly unflappable Ogunlesi a restless moment or two, he wouldn’t have it any other way. After all, he believes that having considerably larger equity firepower at its disposal than any of its peers places GIP in a highly advantageous position.
“There’s actually less competition for larger assets than there is for smaller assets,” he maintains, pointing as an example to the firm’s $2.1 billion acquisition of Port of Brisbane in which he says the GIP consortium was the only interested party to have its bid fully financed upfront.
He refers to other examples where GIP has commited equity sums simply beyond the means of others – $700 million in the case of Ruby, just under $600 million for Chesapeake. “The fact is there are any number of infrastructure fund managers that can write checks for $100 million to $250 million,” he says. “There are not many which can write a check for $500 million to $700 million.”
GIP also sees an opportunity to continue to buy or invest in assets which energy or industrial companies decide they no longer need to own. “If all the pundits are right about what economic recovery will look like in the US and Western Europe over the next three to five years – which is relatively slow growth – I think companies will increasingly look for ways to improve their returns on capital employed and take a view on what to do with assets which have infrastructure-like characteristics and which offer lower returns than their core businesses,” says Ogunlesi, adding that such returns may be “perfectly acceptable” for an infrastructure investor.
GIP has already completed a number of deals with strategic partners. To name a few: Chesapeake Energy Corporation on the Chesapeake Midstream Partners joint venture [which GIP took over in its entirety in July this year and rebranded it Access Midstream]; El Paso Western Pipeline Group on the 680-mile Ruby pipeline; and Fluxys G on an investment in Fluxys Switzerland, owner of Europe’s Transitgas pipeline, connecting gas markets in Germany and France to Italy. The common theme is that such deals invariably demand big tickets, and it’s why GIP often finds itself without competition from other infrastructure funds.
In general terms, the firm does not appear to have too may concerns about its capital finding a home. “This is almost certainly one of the busiest periods we’ve seen at GIP across the US, Europe and elsewhere in terms of opportunities,” says Ogunlesi.
Following the final closing of the GIP fund, there was much talk within market circles about whether it heralded a new dawn for infrastructure fundraising, which – along with other alternative asset classes – has been on an uphill climb since the Crisis. With some confidence that economic recovery may be underway – however slowly – limited partners may indeed have a little more confidence to commit to funds and an upturn in fortunes may be seen in the years ahead.
To form a link to the GIP fundraising would be problematic, however. It should be better viewed as something of an anomaly. In sheer size terms, this is obvious. Research by placement agent Probitas Partners revealed that the $2.5 billion raised by GIP II in the second quarter of 2012 nearly equalled the $2.9 billion raised by all infrastructure funds globally in the first quarter of the year. It also bucks the trend which has seen investors increasingly explore alternatives to the fund model, including by investing in infrastructure assets directly.
Ogunlesi is relaxed about the preponderance of different ways of accessing the infrastructure asset class. “I don’t spend a lot of time worrying about which of the models is the right one,” he says. “My view is there are multiple avenues that will be available to investors and they just have to decide which one they are most comfortable with.”
The firm has, however, responded to demand for co-investment by establishing a club comprising nine institutional investors in the second fund which have the option of investing in deals alongside GIP. This ‘co-investment club’ has swung into action in the two deals so far completed by the fund: the £807 million (€990 million; $1.3 billion) purchase of Edinburgh Airport in April, and the $4 billion deal to buy pipeline assets from Chesapeake Energy Corp in July. “We work with them [the club] when we’re looking at investment opportunities where the capital requirement is greater than what GIP alone will invest,” Ogunlesi clarifies.
Unsurprisingly, it hasn’t escaped Ogunlesi’s notice that there is a potential benefit for GIP of having such a close relationship with long-term investors when it comes to exiting deals. “I think the long duration nature of these assets will fit in some cases with the liability profiles they have and so I think it’s entirely conceivable that there are businesses we’ll be able to sell to some of these institutions.”
One of the key selling points of GIP that these investors will have found attractive is its operational expertise. Ogunlesi points to International Trade Logistics, an Argentinian container terminals business in which GIP invested $289 million for a 50 percent stake, where container processing speeds have increased by 60 percent; Channelview Cogeneration, the Houston power plant in which GIP paid $353 million for a 90 percent interest, where fixed costs have been reduced by 25 percent (more than $10 million a year); and perhaps the most frequently cited example of Gatwick Airport ($314 million for a 42 percent stake), with its shortened and more family-friendly security queues. Many more examples could be given – and Ogunlesi would happily provide them.
One of the nuances which casual observers of GIP may overlook is the degree of specialisation within the operational effort. It has what insiders describe as the “classic ops guys” recruited from the likes of Honeywell, Siemens and GE, but also – for example – a risk team, headed by chief risk officer Robert O’Brien, the former global head of credit risk management at Credit Suisse (where Ogunlesi was global head of investment banking from 2002 to 2004). Ogunlesi says O’Brien brings “decades of experience looking at transactions” and has helped GIP develop “a consistent framework for looking at every single deal”.
And then, in August this year, it added a five-strong team of pipeline specialists from El Paso Corporation headed by Jim Cleary. Cleary had previously been president at El Paso Western Pipeline Group, GIP’s joint venture partner in the Ruby natural gas pipeline. The team had become available when Kinder Morgan completed its $38 billion acquisition of El Paso in May this year (as Kinder Morgan had its own team of specialists).
Covering the bases
Having these kind of specialisms as part of GIP’s armoury is Ogunlesi’s way of trying to cover all the bases and – as far as possible – eliminate costly mistakes. He says: “In private equity you can afford to lose money on several investments and yet still return a 30 percent IRR because you make 10 times your money on one of the other investments. In infrastructure, you can’t afford the losses because you are not likely to make 10 times your money.”
He candidly admits to having learnt the importance of this “the painful way” as a result of GIP’s involvement with UK waste firm Biffa, in which it invested almost $600 million for a 36 percent stake as part of a 2008 deal it completed alongside Montagu Private Equity. Since then the business has struggled with declining waste production due to the recession, a reported £1 billion debt pile and tough banking covenants. It has also been accused of not moving quickly enough to reduce its exposure to industrial waste and expand its recycling business.
The future of Biffa is uncertain, though it was reported that a “highly conditional” £520 million bid was received from a consortium including UK private equity firm Clearbrook Capital Partners in August. With the equity having reportedly been wiped out, the firm’s lenders are also expected to take a significant haircut. Ogunlesi concedes that the investment “didn’t work out the way we wanted it to”.
Overall though, since 2006, things have worked out very much the way Ogunlesi hoped. Some wonder what might happen without Ogunlesi at the helm. An outgoing, effusive individual given to resounding bouts of laughter, Ogunlesi is also seen as authoritative and highly demanding. “When Bayo’s in the room, everyone looks at him,” is how a colleague describes one feature of a GIP meeting. His packed schedule is only going to get busier now that he’s joined the board of Goldman Sachs.
Asked whether he expects an infrastructure fund to one day come along and surpass GIP’s $8.25 billion figure, Ogunlesi pauses briefly and then replies: “It’s possible. When Carl Lewis set the 100 metres record, nobody anticipated Usain Bolt one day showing up. I’m sure that someone someday will break Bolt’s record. So yes, it’s possible.”
There ensues a conversation about sport of a different variety – golf. One gets the impression that Bayo is no slouch when it comes to wielding a golf club and that he strides onto the course with the same winning mentality he has brought to business. Beneath the amiable personality lies steely determination. How else do you raise $8.25 billion?