By Hamlin Lovell, NordicInvestor
Multi-boutique asset manager Fiera Capital Corporation runs c. USD 124 billion as of 30 September 2019. The firm has its foundations in actively managed equities and fixed income but has over the past five years built up a strong presence in alternatives spanning real estate, private equity, private debt, agriculture, and infrastructure. The infrastructure business, Fiera Infrastructure, runs c. CAD 1.8 billion (USD1.4 billion) from three offices in London, Toronto, and New York. The 22 strong infrastructure team work together, formally and informally, on pipelines, prospects, origination, execution, asset management and investor reporting.
“A global perspective lets us evaluate the relative risk-adjusted returns of similar infrastructure projects in different countries on a common basis. For example, renewables is a huge sector where we compare the value equation of return and risk on a global basis. We find renewables in Europe can have too much merchant risk, and power price risk, as power purchase agreements (PPAs) are rather short lived versus asset lives. We prefer projects in the US and Canada where there are longer dated off-takes, and counterparties tend to be government owned entities in Canada or shareholder owned utilities in the US. There is also increasing scope to enter into PPAs with corporates”, says Fiera Infrastructure President, Alina Osorio, who heads the global business from Toronto. She previously developed the Aquila Infrastructure business, which formed a joint venture with Fiera Capital Corporation in 2016 to create Fiera Infrastructure. She was earlier CEO of Macquarie Essential Assets Partnership, North America’s first unlisted infrastructure fund. Fiera Infrastructure’s renewables investments include wind farm Cedar Point II in Canada; solar/wind generation portfolio, Desert Sky LP; and hydroelectric assets.
Some global infrastructure investors are doing deals worth tens of billions, but Fiera Infrastructure is focused on the mid-market: defined as equity below USD 250 million or an enterprise value below USD 1 billion. “The mid-market can offer higher returns than large cap and mega cap infrastructure, where greater competition drives up the prices of trophy assets such as leading airports. There is potential to source deal flow through networks and negotiate terms rather than participating in auctions. Mid-market assets are also easier to grow organically”, says Jason Cogley, who heads the London office and formerly worked for Standard Life private markets.
Within the mid-market, Fiera Infrastructure forages from a broad spectrum of deal-flow, across energy, PPP, telecom, transport and utilities. The manager balances “core” deals that provide more yield and less capital growth with “core plus” deals that offer higher growth and lower yield. The typical split could be 60% or 70% core and 30% or 40% core plus deals. All investments are generating free cashflow, though occasionally it may be temporarily reinvested into building out a business, such as fibre optic cables, rather than immediately distributed. The target yield is roughly 4-6% per year. Historical net IRRs since January 2016 have been in high single digits, enhanced by some project level leverage*.
Many mid-market players looking at these types of deals are regional specialists. “Very few players combine a mid-market focus with global coverage”, says Osorio. The geographic purview is OECD developed markets, and in practice mainly North America and Europe, with Australia and New Zealand the most distant markets. Fiera Infrastructure can contemplate doing deals in South American markets such as Chile, which has a long history of offering investors a stable and predictable regime of structured governance and judicial oversight, and is reviewing opportunities in Mexico and Columbia, which became the 37th OECD member in 2018.
A few case studies show how Fiera Infrastructure has identified unique assets that would not have shown up on the radar screens of many rivals.
Within the telecoms sector, Fiera Infrastructure looked at data centres, towers and fibre before deciding to focus on two fibre investments – in the US and Spain. “Fibre networks serve society’s insatiable demand for data, data transfer and broadband. In the US, we own an equity stake in Conterra Ultra Broadband Holdings, Inc (Conterra), which has more than 11,000 miles of fibre in 35metro areas and is broadening out into enterprise sales as well as internet connectivity for schools, which is being encouraged by the US Government. We are happy to reinvest free cashflow given the high growth as we expect payback of capital investments within an average of 2.5 years”, says Osorio.
“In Spain’s highly deregulated fibre market, we own IslaLink, which provides backbone infrastructure connecting Valencia with the Balearics, selling to telecoms carriers such as Orange, Vodafone, Masmovil, BT and internet service providers, not end users. As such, being the only independent neutral provider, this makes us an attractive supplier. We also have a technically superior asset: a cable which has never failed together with double redundancy via two other routes. Long term contracts have a long average life remaining”, says Cogley.
The UK and political risk
The twin threats of a hard Brexit and/or a Corbyn Government are enough to scare many investors away from the UK, but they may be overlooking some assets that could be great investments over a multi-decade time frame. Though most investors would hope that a Labour Government in the UK is a very low probability, investors are cautious making new investments in sectors targeted by Labour in their policy proposal to nationalize assets such as regulated utilities, rail and broadband detailed in their 2017 manifesto and subsequent working papers and policy announcements. It is very difficult to price nationalization risk and there are different opinions over guidance on issues such as tax, accounting, pension, distributions and most importantly compensation on expropriation”, says Cogley. The two most recent UK deals invested in have been stress tested for a hard Brexit recession scenario.
“The Wightlink Isle of Wight ferry service could prove to be a defensive and resilient asset under a recession scenario, as this could encourage more staycations rather than overseas holidays, based on national tourism office data”, says Cogley.
And Cory Riverside Energy, which generates energy from waste (EfW), should be in tune with government policy whichever party is in power. “There is cross party consensus in support of the EU landfill directive, and the goal to be carbon neutral by 2050. Cory utilizes the Thames to transport waste removing 100,000 lorry journeys off the roads of London a year. The economics of the business also stack up: higher waste import duties on incinerators in the Netherlands make exporting waste more expensive, further reinforcing the need for EfW facilities to process non-recyclable waste that may no longer be economic to export”, says Cogley.
The ‘G’ in ESG – Governance – has always been of critical importance. Fiera Infrastructure not only insists on a board seat for each and every infrastructure investment, but also retains independent directors with specialist skillsets to work on behalf of investors. In some cases, such as IslaLink, Fiera Infrastructure has five board members.
“We are addressing ESG on the asset management side. Our ESG committee provides oversight in ensuring the implementation and progress of ESG initiatives within Fiera Infrastructure. The Transaction Team presents a summary of ESG factors to our external Investment Committee. We are also making clear the importance of ESG to the management teams of individual assets”, says Osorio.
“Indeed, the ‘E’ – environment – is also important and Fiera Infrastructure does not currently have any carbon related investments.”, she adds.
Fiera Capital Corporation is a PRI signatory, and Fiera Infrastructure has received an ‘A’ rating under the Direct Infrastructure category.
In 2019 Fiera Infrastructure joined the GRESB benchmark which requires Fiera Infrastructure to report on detailed ESG practices and performance, which will then be benchmarked against global peers.
An evergreen, open ended fund structure lets investors have sight of an asset pool that is already diversified by vintage, geography and sub-sector. All new investors participate in the increasing diversification offered by a growing pool of assets. There is no pressure to monetise assets to meet the maturity date of a closed end fund.
Being open ended gives substantial flexibility over the timing of initial and subsequent investments – until the fund hits capacity – and possible flexibility over exits: there is potential for redemptions (at a discount to NAV during the first eight years), though this is not guaranteed. “We need to make a case by case judgement call on redemption requests, taking account of: cashflow from yield, asset sales, net inflows from other investors, and leverage facilities on some vehicles. But the base case is that many investors will want to remain invested for 20 or 30 years, since the underlying assets may last at least this long”, says Osorio.
Valuations are carried out annually by an independent external valuation firm (Duff and Phelps).
The Fund has two feeder vehicles which are USD or CAD denominated. The Luxembourg special limited partnership (SCSp), which is run pari passu with a Canadian investment vehicle and separately managed accounts, is likely to be most familiar to European investors. There can also be opportunities for co-investments.