Appetite for infrastructure keeps Nomura busy

As specialist infrastructure funds approach the end of their predetermined lives, they need to offload their investments. A flurry of maturities has given a fillip to mergers and acquisitions (M&A) in the sector, and Nomura’s natural resources, power and infrastructure team for Europe, the Middle East and Africa (EMEA) has been on the case.

The team, headed by former Rothschild and Lehman Brothers banker Richard Noble, operates in a very broad universe. Some recent deals include the sale of two coal-fired power plants in the Philippines, the sale of a shareholding in a French motorway operator, the acquisition of Vienna airport and the acquisition of a stake in RTE, the French electricity transmission network.

Deal flow across the team’s franchise is equally varied, and may include general recycling of capital, privatisations and disposals by large corporates. Politics sometimes plays a part; for example, political tensions have prompted several recent sales of gas transmission assets, while low-carbon policies have shaken up the power generation landscape.

The popular choice

There is no shortage of buyers, particularly for infrastructure and utility assets. “There is a huge amount of capital chasing alternative investments in stable, regulated, contracted assets,” says Mr Noble. 

That interest is coming from, among others, sovereign wealth funds, pension funds and infrastructure funds. And it is global, with would-be buyers now coming from Asia and the Middle East, as well as Europe and North America.

“Long-term interest rates remain low, so the yield generated by these infrastructure assets is attractive,” says Alex Wotton, an executive director in Nomura’s natural resources, power and infrastructure team. “Another reason for the continued strong interest in them is their bond-like nature,” he adds.

A recent spur to activity is the fact that many infrastructure funds, particularly the early ones, are closed-end, defined-life entities approaching maturity. After a prescribed period, perhaps 10 or 12 years, they are obliged to return funds to their investors. 

These funds may occasionally have their lives prolonged, but only for a relatively brief period. “It is rare for limited partners to allow funds to be extended for more than one or two years,” says Henry Phillips, a Nomura managing director in M&A EMEA. “Generally, sponsors have raised another fund and are more focused on that one.”

UK water flows

One of the more attractive infrastructure segments is the UK water sector, because of its strong regulatory framework. Towards the end of 2015, Nomura was mandated to advise Macquarie European Infrastructure Fund II, which was nearing maturity, on the disposal of a 26.3% stake in Kemble Water Holdings. Kemble is the ultimate owner of the UK’s largest water utility, Thames Water, and the stake was Macquarie’s largest European infrastructure investment.

Macquarie was one of the pioneers, if not the pioneer, of infrastructure as a new asset class. In fact, in 2003, during his time at Rothschild, Mr Noble helped sell Macquarie one of its first UK assets, South East Water, which it bought from Bouygues of France.

In 2012, Mr Noble advised a Cheung Kong Infrastructure-led consortium when it acquired Wales & West Utilities from an investor group led by Macquarie, so he knows them well. The relationship is further cemented by the fact that Mr Wotton was originally recruited from Macquarie’s advisory business.

“A sale of the Thames Water stake had long been on the cards,” says Mr Noble. “We had spent a lot of time with Macquarie and the other shareholders, to build a picture of what investor appetite – internally and externally – might be.”

The internal investors – being the other existing shareholders – were an important constituency because they had a right of first offer (ROFO). There were 12 of them with stakes ranging from 13% to 2%, and any one could have been a buyer of the Macquarie holding. “It was our job to generate competitive tension across different pools of buyers,” says Mr Phillips. But even as the team was setting about that task, along came the Brexit referendum and its surprise result.

Brexit impact

The vote to leave the EU made the investment community in general take stock of how Brexit might affect their appetite for further investment in the UK. While there was a handful of UK-based sterling institutions who were potential bidders for the stake, most of the likely buyers were of international origin from North America, the Middle East, the Far East and Asia.

As it turned out, Brexit-inspired anxieties subsided relatively quickly and the team was able to proceed with the complications of the ROFO process. “We sounded out investors to help establish the appropriate price for Macquarie to run the ROFO at, but the offer was not taken up,” says Mr Phillips.

Then it was on to the auction proper. The successful bidders, announced in March, were Borealis and Wren House. They are the infrastructure arms of Canadian pension fund Omers and the Kuwait Investment Authority. The price was not disclosed but has been reported as £1.35bn ($1.75bn).

With the Thames Water sale under its belt, the Nomura team was qualified to act in a similar sale involving another UK water company (though 100% of it this time) and another infrastructure fund approaching the end of its life.

The water company was Affinity, the UK's largest regulated water-only business. There were two key vendors – Morgan Stanley Infrastructure Partners (MSIP, a fund that was close to maturity) and Infracapital, the infrastructure equity arm of M&G Investments. There were other minority shareholders but a shareholders agreement obliged them to sell along with MSIP and Infracapital.

Here too there was an existing relationship as Mr Wotton had advised the two key shareholders when, together, they acquired the Affinity stake. It seemed logical to Nomura that, at a certain time, they would be looking for an exit, though on this occasion the team approached the transaction differently.

“You would normally auction a company if you were looking to sell 100%,” says Mr Phillips. “But we helped to line up a very credible consortium of buyers prepared to pay a fair price.”

Why auction?

Indeed, an auction for Affinity had been in the pipeline. For any seller, sidestepping an auction to accept a firm offer has an upside and a downside. The downside is that an auction might have generated a higher price. Set against that is the certainty of the offer.

In the time it takes to conduct an auction, something bad could happen to the company or the market could take a turn for the worse, resulting in a lower price or no sale at all. And the party making the offer can make it clear that, if its offer is not accepted, it will not participate in any subsequent auction.

“An auction had been planned to start after Easter this year, but then our clients submitted a pre-emptive offer, which was sufficiently attractive to the vendors,” says George Chalaris, a vice-president in the natural resources, power and infrastructure team at Nomura.

The offer came from a three-party consortium, consisting of Allianz Capital Partners (ACP), Dutch Infrastructure Fund (DIF) and HICL Infrastructure. ACP manages the alternative equity investment portfolio of insurer Allianz, and infrastructure is one of its specialties. DIF is a specialist infrastructure fund manager, and HICL is a FTSE-250 listed infrastructure investment vehicle, advised by InfraRed Capital Partners.

Affinity was sold for £1.6bn, the second largest UK water sector deal in the past five years after the Thames Water deal. “The transaction was a lot quicker than Thames Water from beginning to end, partly because there was no ROFO,” says Mr Phillips.

These deals enhance the bank’s infrastructure credentials, says Mr Noble. “The momentum around these deals puts Nomura at the heart of the utilities and infrastructure sector at the moment,” he adds.