With interest in infrastructure investing increasing significantly in recent years, AMP Capital’s David Rees explains how asset managers are looking to new technology to bring PE-like rigour to the sector and add value for investors…
The McKinsey Global Private Markets Review 2019 (Private markets come of age) notes that infrastructure expanded ‘appreciably’ in 2018 and is part of a secular trend that has seen public and private spending grow 4.2 per cent annualised in recent years.
The telecommunications sector, in particular, enjoyed record growth in 2018, attracting approximately USD11 billion in global net equity inflows according to Infrastructure Investor.
Against this encouraging backdrop, infrastructure investors are facing more competition than they did a decade ago. Leading asset managers such as AMP Capital, one of the world’s top 10 infrastructure investors, are mindful of this and using technology innovation to stay ahead of the curve, and introduce private equity-like rigour to how it manages its investment portfolios to deliver real value to its investors.
And in doing so, further differentiate AMP Capital against the competition.David Rees (pictured) is Partner and Global Co-Head of Asset Management in London. He says that with increased competition there has been increased pricing for trophy assets. In that world, he says, if returns are trending down one needs to find ways to add value to retain investors.
“One way of doing that is to adopt what I would call a more active asset management philosophy to infrastructure investing, which is what we focus on at AMP Capital. What was for infrastructure funds investing in more vanilla, utility-type companies, which involved more of a governance role as an asset manager, has now become more active, in terms of how to make infrastructure businesses perform better,” says Rees.
With more than USD20 billion in infrastructure AUM, and more than USD10 billion in equity-backed investments, Rees and his team focus on selecting assets in the mid-market to drive returns and apply an active portfolio management skillset.
“Equity investments of USD1 billion or more in infrastructure are relatively few and far between,” says Rees. “The deals we do are around half that size. That bringopportunities because these businesses tend to be small to mid-sized enterprises that typically don’t have sophisticated corporate approaches.
“It’s harder to attract talent to a smaller company than it is a large one so for us, that gives us more opportunities to work with, and improve their businesses. Also, there is more value to be found (and created) in the mid-market, where the level of competition is not quite as strong as it is for trophy assets in the large-cap space.”
One of the ways to drive value is to identify platform growth opportunities, where the AMP Capital team can pursue bolt-on acquisitions to grow a specific asset’s top-line revenue. Rees confirms that every asset it looks at needs to have clear signs of top-line revenue growth. This may sound obvious but if one considers regulated utilities, for example, growing the top line is hard because it is effectively set by the regulator; the only real options are to pursue a cost reduction strategy or finance it with cheap debt.
One example in the portfolio of how AMP Capital is driving value without pulling either of the above levers is Adven, a leading provider of energy services in Finland.
“When we bought it, it was a predominantly Finnish business with some revenue coming from Estonia. We then helped them expand into Sweden by finding and funding a Swedish district heating business, which was approximately one third of the size of Adven; so it meant bulking up the business quite considerably with one acquisition.
“That gave Adven a significant bridgehead into Sweden which would have otherwise taken three years or more to create. And they are now using that as a platform for growth and winning more new business.
“It’s not easy to add 30 per cent to your top-line revenue in one fell swoop,” explains Rees.
Technology innovation plays a vital role in how AMP Capital thinks about creating long-term value in its assets and there are various aspects to how this is being made manifest.
On the human level, AMP Capital recently hired Tom Preising from Apple as a senior adviser. Prior to this, Preising worked at Hewlett Packard for a decade.
“What Tom brings, most importantly, is a fresh perspective and a different way of looking at old assets that you wouldn’t necessarily get in your average infrastructure fund business,” says Rees.
“You now have smart energy, smart communications coupled with things like the Internet of Things (IoT). So there will be huge changes to the infrastructure industry over the next 20 years – the world is going to look very different and in ways one can only guess at right now.
“As an active asset manager, you’ve got to recognise that times are changing and to have people within the team that understand that and own that mindset.”
One of the first tasks that Rees and his team performed with Tom Preising was a full technology systems audit of each and every portfolio company in the AMP Capital Global Companies Fund
What they found was a wide range of outcomes: some companies were excellent while others were doing very little on the technology side and “still using quill pens”.
“Just the mere process of conducting that systems audit with Tom taught us quite a lot about what we could do to improve companies and how they could learn from each other,” says Rees, who adds that another aspect of technology was the creation of a new program to encourage the sharing of best practices across portfolio companies,
“We launched a program called ORCA One. It helps us collaborate with the different businesses within our portfolio.
“A great example of this is where Axion, a Spanish wireless telecommunications company who are providing 5G infrastructure, were able to help install a distributed antenna system within an underground carpark in Chicago, operated by Millennium.
“Our team was able to act as a conduit to allow this collaboration between the two portfolio companies. It’s about finding best practices and spreading them across the portfolio to be uniformly applied. That in itself is hugely value accretive,” asserts Rees.
A third strand to technology innovation is how AMP Capital uses it for talent management.
“If I had to refer to one major element that we want to adopt from the broader private equity industry it would be talent management. That’s where the real value is,” states Rees.
“Under the ORCA One program, we do not want someone to only think of themselves as the CEO of Leeds Bradford Airport, but as a senior executive within the AMP Capital portfolio. By doing so, we open up a whole new world.”
“It also means that when the day comes to sell a portfolio company, we can re-position a CEO somewhere else within the AMP Capital portfolio.
“Malcolm Brown was the CEO of Angel Trains, and he has now come into the fund in a new capacity. He will not go with Angel Trains when we eventually sell it. Equally, Hywel Rees has gone the other way; he was in the asset management team looking after airports and he is now the Chief Executive of Leeds Bradford Airport.”
Just as surely as night follows day, Rees is confident that a more rigorous private equity approach to infrastructure investing will be seen as asset managers look to make a difference.
“My ambition is to grow the asset management team both in London and in the US over the next few years,” he concludes.
Just like the killer whale it named its program after, AMP Capital clearly intends on staying ahead of the competition as an apex predator.
