The non-core journey, contrary to popular belief, is well on its way rather than still being in its infancy, as previous market commentators have led many to believe
- Between 2010 and 2016, more than half (53 per cent) of all non-core infrastructure investment was made by infrastructure funds
- In value terms, transport (41 per cent) and power (28 per cent) are the main sectors for non-core infrastructure investment, with assets such as car parks, motorway services and midstream oil and gas assets leading the way
- Western Europe is the main region for non-core investment, with the UK market leading the way. From 2010 to 2016, non-core investment levels in the UK market amounted to €16.67 billion—double that of Germany, the second-most popular market for non-core capital
- Despite the UK's impending exit from the EU, UK investment levels are forecast to hold up in the coming years
The investment levels in non-core European infrastructure assets have more than tripled over the last seven years. And infrastructure funds have been the most active players in the non-core infrastructure space— accounting for between 44 per cent and 66 per cent of investment volumes in non-core infrastructure M&A activity between 2014 and 2016.
Although the crowded core infrastructure space and lack of quality returns were the main factors that led to this migration, InfraDeals data shows that these same dynamics are increasingly forcing their way into the non-core space.
A review of the most recent deals in the space shows that institutional investors are now steadily following their infrastructure fund counterparts into this lucrative area.
In 2011, infrastructure funds were largely the only investors in non-core infrastructure. However, in 2013, for example, institutional investors contributed a 48 per cent share of the segment, although this plummeted to just 3 per cent in 2016. Fluctuating levels of institutional investment in non-core can partially be explained by the cyclical nature of infrastructure fund asset disposals—large non-core divestments do not necessarily occur every year. While there have certainly been ebbs and flows in the level of institutional investor involvement, it is clear that infrastructure funds can no longer take the non-core marketplace for granted.
Non-core sector watch
On a sectoral level, InfraDeals data reveals that transport (41 per cent) and power (28 per cent) lead the way for non-core investments—although such transactions tend to occur sporadically across a diverse range of sectors.
Within the transport sector, rolling stock remains a popular non-core infrastructure sector. While rolling stock in the UK has passed into the hands of institutional investors and is viewed largely as a core asset, in continental Europe rolling stock assets fall within the non-core classification. This is due to the increased competitive dynamics within the sector as markets continue to free up and investors look to capitalise on the trend of train-operating companies moving away from owning their own fleet.
While PSP Investments, Arcus Infrastructure Partners and AMP Capital continue to back Luxembourg-based Alpha Trains, originally part of the Angel Trains Group acquired back in 2008, there are numerous other examples of these transactions in recent years. Morgan Stanley Infrastructure Partners acquired a minority position in German-based VTG, and Deutsche Alternative Asset Management took a 50 per cent stake in France-based Akiem in 2016. Looking ahead, J.P. Morgan is understood to be in exclusive talks to acquire UK-based group Beacon Rail from Pamplona Capital Management.
These assets have strong market positions but all are exposed to competition. To add value, investors must improve operational performance. This includes tightening up maintenance and scheduling while also pursuing acquisitive growth strategies through bolt-ons and opportunistic acquisitions of smaller rolling stock fleets.
Smart metering is another non-core asset class that has attracted interest from both infrastructure funds and institutional investors alike. For several years, EU countries have promoted the rollout of smart gas and electricity meters as a way of aiding consumer energy efficiency efforts, and this deployment is now in full swing. KKR Infrastructure's acquisition of Calvin Capital from Infracapital at the start of 2017 is the most recent example of a deal in this sector.
However, it is an area that comes with a number of challenges. For example, the German smart meter market is unregulated, with revenue derived from short-term contracts. This is a feature bidders will have to factor in if, as anticipated, Macquarie-owned Techem is put up for sale this year. In the medium to long term, the market will also be exposed to technology risk as the metering and energy servicing space continues to digitalise.
Funds are also increasingly targeting services groups that support the operation of infrastructure assets. The asset-heavy nature of these businesses makes them attractive, as this serves as a barrier to entry for any potential new entrants.
AMP Capital and 3i Infrastructure's acquisition of Danish company Esvagt—a provider of emergency response and rescue vessel services to the Nordic offshore oil and gas industry—in 2015 is a clear example of this trend. Deutsche Asset and Wealth Management and 3i Infrastructure's acquisition of Belgium-based airport equipment leasing business TCR in 2016 proves that it is likely to continue.
However, such transactions can throw up financing challenges for supporting banks that do not always know whether to categorise these deals as private equity or infrastructure.
Car park assets, which can offer good visibility on revenues, depending on where they are located, are another market segment attracting widespread investment. Investors are currently bidding for the Q-Parks car park business in the Netherlands for example. However, car parks are still subject to demand risk and varying levels of competition.
"The risk profile of car parks depends on where the asset is, there are some that are core—and there are others that are non-core—for the right asset, where there are high barriers to entry and it's a de-facto natural monopoly, I'm not surprised to see aggressive bidding," says Morgan Stanley's Donzelli.
Recent sector activity indicates some early investors in the non-core space have now sufficiently de-risked their non-core assets enough to entice institutional investors into their auctions and thereby contribute to the wider migratory trend of institutional investors into the marketplace.
EQT Infrastructure's divestment of Koole Terminals in the Netherlands in 2015 to OTPP and J.P. Morgan is one such example. In addition, non-core sectors including car parks—such as Vinci Parks in France, acquired by Crédit Agricole Assurances (CAA) subsidiary Predica, together with Ardian Infrastructure in 2014—and motorway services such as German group Tank & Rast, acquired by ADIA, Allianz, Borealis and MEAG in 2015—have recently drawn in large capital volumes from institutional investors who have grown increasingly comfortable with the risk profile and yield potential of these asset classes.
The regional picture
When it comes to regional investment in non-core assets, the data reveals a bias for investment in Western European markets, as these jurisdictions offer relatively low levels of political, regulatory and economic volatility.
The UK is the clear winner in terms of capital deployed to non-core infrastructure. From 2010 to 2016, it saw €16.67 billion being invested into its non-core sector, easily dwarfing the German market, which took in €8.06 billion over the same period.
In the UK, the transport sector received the lion's share of non-core capital led by big ticket investments into three UK rolling stock companies—Angel Trains, Eversholt and Porterbrook.
Meanwhile, German non-core activity was dominated by the €3.5 billion acquisition of motorway services group Tank & Rast, although EQT's divestment of waste treatment and energy business EEW Energy from Waste to Beijing Enterprises also contributed €1.4 billion to the total.
Spain and France took third and fourth spots respectively. In Spain, non-core power transactions made up the bulk of activity, spearheaded by the €2.5 billion Macquarie and Kuwaiti sovereign wealth fund Wren House's acquisition of E.ON's power assets in 2015.
Spain suffered from a drop-off in infrastructure investment activity in the wake of the 2008 economic crisis and the controversial changes made to its renewable energy support system. However, the data reveals that international investor confidence is now returning, and the country is expected to cement its position as a key European market for non-core deals over the coming months.
Activity in France was led by investments in the country's telecommunications sector, in particular the €3.56 billion acquisition by Arcus, APG, Brookfield and PSP Investments of telco infrastructure operator TDF's French division from a consortium of private equity investors in 2015.
Next stop on the non-core journey
In 2017, infrastructure funds must now begin to adjust their investment and exit strategies in the non-core marketplace to reflect the reality that institutional investors are very much here to stay. Such investors will increasingly import the same level of competitive tensions seen in the core infrastructure space into the non-core arena. The non-core journey, contrary to popular belief, is well on its way rather than still being in its infancy, as previous market commentators have led many to believe.
While certain funds have already used this evolutionary step to their advantage by de-risking assets and packaging them up for exits to institutional investors that are moving into the non-core space, others will invariably be slower to react. They will be reluctantly pushed out to pursue even riskier non-core investment strategies in geographies and industries that may be ill-suited for their investment programme and expertise.
Only time will tell how the non-core marketplace will develop, but what is certain is that the competitive landscape has already permanently changed and only those that are willing to adapt and grow will be successful in navigating the journey towards positive returns.
Five of the best
The table below shows five of the highest value non-core European deals between 2015 to 2017
|Tank & Rast Motorway services||Germany, 2015||ADIA, Allianz, Borealis, MEAG||Deutsche Alternative Asset Management, Terra Firma|
|TCR Airport equipment leasing||Belgium, 2016||3i Infrastructure, Deutsche Alternative Asset Management||Chequers Capital|
|VTG Rail leasing||Germany, 2016||Morgan Stanley Infrastructure Partners||Private individual|
|Westerleigh Group, Crematoria infrastructure and services||UK, 2016||OTPP, USS||Antin Infrastructure Partners|
|Calvin Capital, Smart meters||UK, 2017||KKR Infrastructure||Infracapital|
Infrastructure M&A: Journey to the non-core
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