Welcome to the ‘new normal’

“I heard a politician on the radio the other day saying ‘let the euro collapse’, which is seriously scary,” notes Thomas Putter, former co- head of German insurance giant Allianz’s alternative assets business – among many other notable roles – as he perches on the edge of a leather sofa in his family’s Knightsbridge apartment. Putter is too modest a man to describe his abode as luxurious but let’s just say it’s very comfortable. And, as he notes from the balcony, Harrods’ food hall is conveniently close by – potentially within range of some kind of notional pulley system, he suggests, that could bring a whole new meaning to the phrase ‘convenience shopping’.

But, while the setting may be relaxing, these are stressful times. We meet in early November, as profound fears about Greece give way to near-panic over Italy. On my way to the interview, I noted police vans lining roads and helicopters whirring overhead as protesters took to London’s streets. This was the latest in a series of marches about cuts in education, but protest of all kinds is catching on in the capital city – a contagion of social unrest mirroring the sovereign debt contagion in the Eurozone. On the balcony, Putter notes a small dried animal bone that has appeared from nowhere as if to lend a hint of post-apocalyptic weirdness to proceedings – random but apposite.

‘Enormous uncertainty’

Putter has every reason to hope for calmer times, given his plans to  involve himself in a fund management business in the renewable energy space. But he understands why, at the current time, investors are reluctant to make commitments to alternative asset fund managers. “The economic outlook is very uncertain,” he reflects. “Will there be another crash? What will be the effects and the outcomes? There is this enormous uncertainty and, if you’re the investment manager of a pension fund making 20-year commitments…” The sentence tails off, but the point is easy to understand.

Moreover, it’s not just the economic climate giving people reason to be cautious. “Investors face an uncertain regulatory environment where they’re not 100 percent sure of the consequences of things like Basle III and Solvency II,” says Putter. “They are struggling to assess what their exposure to various asset classes will mean for their own regulatory position.”

Putter views the caution as “rational”, while also believing that the period of introspection will pass. “Risk calculation is very difficult in a volatile environment,” he acknowledges. “But the antidote to volatility is time, and talking of the death of asset classes is uninformed. Indeed, market leaders continue to invest and are able to exploit price advantages before the wall of lemmings arrives.”

Putter is typically obliging as he jumps up to assist photographer James with the lighting as a dark shroud begins to fall over what had been a bright sunny day. Not five minutes previously he’d been making mugs of tea for all three of us, at which point he requested a picture of himself wearing a pinafore in the kitchen as proof to his wife that he’d been carrying out domestic duties. For an authoritative figure, Putter has a nice line in humour and a way of putting people at ease.

Settling back onto the sofa, Putter continues the theme of caution – but this time he’s making the case for investors to exercise even more of it. Specifically, he believes that certain types of asset that are labelled ‘infrastructure’ do not really belong in the infrastructure asset class. The problem is that investors may just take it for granted that the label is appropriate and, therefore, may not understand – or take the time and trouble to acquaint themselves with – the actual risk/return profile rather than the assumed one.

Here’s one example: “To me, an airport is not an infrastructure asset. The skills to make an airport successful are operational skills – retail, marketing, resource allocation, operational efficiency and cost management. These skills are commonly used in the buyout world. The thing is, if you’re taking buyout risk, should you not be achieving a buyout return? That will be tough in this environment. So what better than to call an airport ‘infrastructure’ as a way of managing return expectations?”

He continues: “I’m not saying that airports should achieve the same return as the buyout of a manufacturing company, but neither do I think they should achieve the same return as a toll road.”

Skill sets

There is a “sore point” that Putter feels he touches upon when talking about this subject with investors. Namely: can managers of assets in all honesty match their skill sets to the assets in question? He refers to his experience as a board member of German motorway services chain Tank und Rast and says that “not a single measure taken to create value in that business was a measure normally taken by infrastructure investors”. Despite this, “it’s called infrastructure today and it’s been traded as an infrastructure asset”.

His message for limited partners? “I want institutions to think carefully about the appropriate risk/return for things that are called infrastructure. The asset class should be about real asset-backed businesses, long-term investment, steady cash flows, often regulated and with quasi-monopolistic characteristics, such as electricity networks or gas pipelines. I’m concerned that, amid the frenzy surrounding the new fad of infrastructure, people have lost sight of certain risk/return fundamentals. They need to be analysed properly.”

There is another important consideration to be made by all those involved in the infrastructure asset class. Putter refers to it as “social dynamite” and recalls with mirth that, when he raised the subject at a recent seminar organised by insurance company Marsh, it caused “quite a stir”. It relates to the way in which private investment in infrastructure might be perceived at a time when prices for certain essential services almost certainly need to rise against a background of economic strife.

“The world has irrevocably changed as a result of the crises of 2007-09 and the one that started this year and will continue into next year,” says Putter. “There is a ‘new normal’ involving a recalibration of value sets and priorities. When such a recalibration takes place, it does not come out of a rational, carefully evaluated view but a deep gut feeling on the part of society at large about notions of fairness. We are in that environment and we need to be very cognisant of it.”

The sensitivity that infrastructure investors must face is that resource shortages mean the price of certain things need to rise. “Governments know that the world will increasingly develop into a world of resource shortages and there’s no way but to regulate these shortages through price mechanisms.” The obvious problem with this is that “people will think the world has become less fair” and private capital providers will be on the hook. “You will have financiers, who you would never have invited to your Christmas party in the first place, making money out of a resource that you had taken for granted.”

Fair weather friends

Given a global infrastructure investment requirement that has been estimated in the region of $40 trillion – which Putter points out is more or less the equivalent of the world’s total indebtedness – one might have thought that politicians would stand shoulder-to-shoulder with private capital providers in helping to make the counter-argument against accusations of profiteering. After all, it’s fairly self-evident in the current climate that governments need the help of private capital as never before.

Putter, however, thinks political support should not be taken for granted. “At a time of hardship, inequalities are always more accentuated in the public perception and can become an easy political anchor for governments struggling to find answers and benefitting from the public’s identification of targets that can deflect from their inability to achieve short-term fixes.” Putter does not use the word ‘scapegoat’ but it’s possible to infer it. He does use the phrase “political expediency”.

The irony of what may be a looming public relations battle is that, anecdotally, many infrastructure investors are attracted to the asset class by the thought that there is a public service element to it. For example, those targeting the renewable energy space – such as Putter himself – often appear genuinely motivated by the thought that what they do will leave a lasting, beneficial legacy. But rather than focusing on why renewable energy is needed, much news coverage is instead devoted to the rising short-term cost to the consumer that stems from getting the renewable energy industry up and running. This, Putter insists, “misses the bigger picture”.

In referring to these kinds of issues, Putter is speaking from personal experience. He had already been a board member of BVK (the German Private Equity and Venture Capital Association) since 2001 when he was asked to become chairman in 2005. This was at around the same time that Franz Muentefering, then leader of Germany’s ruling Social Democratic Party (SPD), referred to private equity firms as locusts (“Heuschrecke”). “It was, euphemistically, an interesting time,” reflects Putter.

One lesson that can be transferred to the infrastructure asset class is that “the industry shouldn’t hide”, according to Putter. “You can’t become an ostrich and stick your head in the sand. There was either wilful misunderstandingabout private equity or just ignorance. But it was the result of the industry not having explained itself.”

It’s fair to say Putter was no ostrich. He recalls attending the Capitalism Congress of the SPD and being “in a minority of one, with 700 people staring at me”. He took his message to the Trades Union Congress as well and says that everyone on the BVK board “did their bit and achieved greater transparency and acceptance”. As an aside, it’s interesting that this transparency extended to naming and shaming firms that “were not as responsible as I and others would have liked them to be”. Excluding certain firms from the association was even considered. 

Born in Germany and brought up in England – where he has spent around 30 years of his life – Putter says his father was a “corporate nomad” within an American  multinational. This, he says, helped form his own personality and may explain why he has served a number of different organisations in multiple markets. Having started his career with Continental Illinois National Bank and Trust Company of Chicago in 1980, and worked in investment banking at Swiss Bank Corporation, he then became chief financial officer of privately owned German financial services firm Matuschka Group.

It was at Goldman Sachs that Putter first became involved in principal investing. Allianz, the German financial services giant, approached Putter in 1995 and informal discussions began about the possibility of building an alternative assets business. As he was having lots of conversations about the subject, Putter says he decided to jot down his thoughts to save time. The resulting document was one day pulled out of a drawer by Allianz’s chief financial officer, who asked Putter: “How would you like to execute it?” After some initial reservations about Allianz’s conservative business culture, Putter decided to take up the challenge.

With a focus on private equity, it was agreed that Allianz Capital Partners – as the business was called – would “experiment” for a three-year period with buyouts, growth capital, venture capital and mezzanine debt. Venture was soon terminated  “as it was very difficult to do as a captive” while mezzanine, after a successful period, was eventually stopped in 2005 “as everyone was piling in and the pricing went skew-whiff”. The buyout and growth capital strategies prevailed.

The roots of Putter’s and Allianz’s involvement in renewable energy investing date back to Allianz’s acquisition of the 80 percent of Dresdner Bank it did not already own in a €20 billion deal in 2001. Following this, the two organisations’ alternative asset management arms were combined under a new holding company which Putter headed. Although most of the Dresdner activities were subsequently spun off or closed, part of the renewable energy team was retained.

This decision proved to be a fruitful one. In 2004, Allianz Capital Partners and private equity firm Apax Partners both took 50 percent stakes when acquiring Hansen Transmissions, a Belgian wind turbine gearbox manufacturer, from Invensys for €132 million. Two years later, the company was sold to Indian wind power business Suzlon Energy for €465 million (a “very successful” deal in Putter’s words).

Having got comfortable with the wind infrastructure sector, Putter noted that it provided characteristics that a pension or insurance company should be interested in and recommended launching a new business in the space that would make equity-only investments in assets to be held for between 15 and 25 years. “It would mean a significant amount of money could be put to work, would provide a good return and, because it was equity only, there would be no complex project finance requirement,” says Putter.

Putter was instrumental in the eventual launch of the business, named Allianz Specialised Investments, in 2006 with the hiring of chief executive David Jones, former head of oil giant Shell’s global wind power business. The decision to invest only equity was, in retrospect, even more inspired than it first appeared. “When the Crisis came along and credit dried up, you were the king of the hill as an equity-only business,” relates Putter. He says the business took off at that point and had invested around €1 billion in continental European wind farms by the time he left Allianz in 2009.

The deal that wasn’t

Also in 2006, the same year that the wind business was launched, Putter spearheaded the attempted acquisition of UK developer John Laing. Having decided that the infrastructure opportunity was appealing in a broader context than just wind, this was a potentially game-changing move that would have brought the UK’s largest portfolio of public-private partnership (PPP) and Private Finance Initiative (PFI) assets into the Allianz fold.             

“It was a meeting of minds, and we felt that we could turbo-charge their activities,” recalls Putter. “We made a tender offer and reached agreement with the board but then a rival bidder [Henderson] outbid us twice and we said ‘that’s enough’.” Henderson went on to buy the business for a reported £1 billion – a deal which, incidentally, went on to cause Henderson no end of headaches in relation to a growing deficit in John Laing’s pension scheme.

Putter’s departure two years ago came in the wake of the Crisis and the regulatory pressure that it placed on businesses like Allianz. “Capital reserve requirements were becoming very expensive and, in 2009, I decided to be more entrepreneurial than Allianz could afford to be,” he says. Since then, he has had no shortage of advisory roles for the likes of Greentech Capital Advisors and Swiss Re while hatching plans for a new business to be launched next year.

Right now, Putter has more immediate priorities – his wife and daughter have just arrived to whisk him off to an evening function. Duty calls.