Tried closing a large infrastructure deal lately? No easy task for anyone, not even Global Infrastructure Partners (GIP), the heavyweight investment firm led by chairman and managing partner Adebayo Ogunlesi.
According to media reports, GIP recently had a fully funded bid for London’s Gatwick Airport rejected by BAA. It was also one of the bidders disappointed by Australian transport infrastructure group Asciano’s decision to issue fresh equity rather than sell off assets.
GIP’s debut fund made its first investment in 2006 and held a final close on an extraordinary $5.64 billion two years later. With $3.7 billion (65 percent) of this pile still to be invested, one might expect the firm’s partners to be growing impatient with a market environment in which the finish line seems to remain elusive all-too-often.
But if there is growing pressure on the firm to deploy more money soon, a meeting with Ogunlesi in mid-June does not reveal it. “Bayo”, as he is commonly known, appears relaxed. If he has a concern at this moment, with the photographer hovering, it’s whether or not to put on a tie. He makes up his mind, then settles into a chair to talk business. “You can ask me anything you like”, he encourages the two reporters sat in front of him. The offer seems genuine, but it’s also apparent from the get-go that a no-nonsense approach to the conversation is expected.
Prior to setting up the firm, Ogunlesi excelled in some of the most senior management positions on Wall Street. A practitioner who has known him for 20 years describes him as “tough but fair – demanding of others, but also demanding of himself.” And: “He’s definitely the man in charge at GIP.”
Another person who has negotiated with the Nigerian describes him as “an outstanding operator”. As the conversation with Infrastructure Investor gets underway, it quickly becomes clear why. Ogunlesi is charming and engaged and makes point after point with impressive precision. His enthusiasm for the firm he leads is striking, too.
Although he declines to discuss Gatwick, Asciano or any other asset currently still in play, he does admit that it’s difficult to close deals right now. He points to the pre-bubble rise and subsequent fall in asset valuations, which has opened a gap between sellers’ expectations and what he calls the “new reality we’re in”. Neither are the credit markets much help at the moment, with banks either out of the market altogether or staying focused on brand-name corporate clients.
The third reason Ogunlesi cites as to why deal flow is so slow is that infrastructure businesses are having a tough time as a result of the global crisis: “Even good infrastructure assets are not immune from the underlying performance of the economy. Wherever you look volumes are down, whether it’s ports, airports, or US electricity consumption, which in 2009 is for the first time ever experiencing a second consecutive year of declining demand. When you have a recession of the scale we are seeing today, it’s no surprise that sellers are cautious about selling, and buyers are cautious about making investments.”
Once economies revive, more opportunities will become available, he predicts, without volunteering any predictions as to when this is likely to happen. But when the recovery comes, having kept much of its powder dry will put the firm in a promising position: “When you have the kind of capital we have to invest, that’s a very good strategic advantage.”
Ogunlesi says GIP is looking forward to investing as a strategic partner in businesses with limited access to capital markets, which may need help with what he calls the implementation of their capital programmes, or companies looking for post-crisis recapitalisations of their balance sheets. These potential joint venture partners may not be infrastructure companies per se, but will likely own infrastructure assets that are crucial to their core business areas and require a specialist to improve operational efficiency. GIP wants to be that specialist, partnering for example with a mining company that owns a railroad or port assets.
Even now the firm is having conversations with executives who want to do a deal, Ogunlesi says. But again, getting to closure is difficult: “There’s at least one CEO I’ve talked to who said ‘look, we’d love to do a transaction, but we showed it to the board and explained that the valuation makes sense, it’s what the new normal looks like ’, but the board said ‘work harder, and wait until valuations come back up’.”
Cash is king
What about the assets GIP already owns – are they not feeling the squeeze at this moment? The firm announced its first-ever transaction, the acquisition of London City Airport, in October 2006. Since then it has built a portfolio that also comprises a collection of ports in Europe and Latin America (2007 and 2008), a petroleum storage company in India (2007), UK waste manager Biffa (2008), and Channelview Cogeneration Facility, an 830 megawatt power company in Houston, Texas (2008). Given the timing of these investments, how are they faring now? And did GIP overpay for some of them?
Ogunlesi, without missing a beat, says the answer is no. “Look at our investment history. In 2006, we invested $375 million in City Airport. In 2007, we invested the princely sum of just over above $100 million, because we thought the prices that were being paid were, shall we say, challenging. In 2008, when valuations started to came down, we invested $1.4 billion. So, most of our investments were not made at the peak of the market.”
Besides, GIP has never been ‘enamoured’ of using leverage aggressively, he continues. “One of the mistakes people have made is that they’ve taken perfectly good assets and put financing structures on top that really made no sense.” He points to the demise of Babcock & Brown as an example of what happens when excessive leverage is put behind acquisitions, adding that the phenomenon has led to questions in some investors’ minds as to whether infrastructure is a viable long-term asset class.
By contrast, he notes, Biffa was originally financed with 40 percent equity and 60 percent debt; City Airport was 50 percent equity and 50 percent debt. The other four GIP investments completed thus far didn’t use any leverage at all.
When asked if, depending on the valuation, funding a purchase with 50 percent debt can’t still cripple the asset, Ogunlesi acknowledges the point. “Yes – and when we bought City Airport, the general consensus was, ‘these guys overpaid’. But EBITDA was up 60 percent the first year we owned it, the next year it was up another 40 percent. More importantly, we have no covenant issues or near-term financing requirements in the portfolio, and we focus heavily on cash flow management and cash generation. A lot of other people look at EBITDA as the main measure, but we think cash is king. Cash creates the fundamentals that are essential to making sure the business is surviving and successful.”
The other big theme in the GIP philosophy is an all-pervasive emphasis on improving an asset’s operational efficiency and the service quality provided to the end user. Both tasks require the application of industrial best practice, which in the case of formerly state-owned assets in particular often necessitates a change of culture for management and staff.
In discussing GIP’s preferred asset management concepts, Ogunlesi comes back to the need for operational improvement time and time again. At one point he even throws in a reference to “Six Sigma” – testimony to that strand of General Electric DNA that runs through the firm. GE, alongside Credit Suisse, is a $500 million anchor investor in the GIP fund; operating partner Bill Woodburn spent many years running GE divisions under Jack Welch and Jeff Immelt.
Ogunlesi himself, along with partners Jonathan Bram, Matt Harris, Michael McGhee and Mehrdad Noorani, is a Credit Suisse veteran. Born into a family of doctors and raised in Nigeria, he was educated at Oxford and Harvard universities, became a lawyer and went into banking after a stint of working for the US government in Washington. It was at this early stage of his career that he first came into contact with project finance. On Wall Street, his ascent was meteoric: he joined First Boston and later became a confidant of Credit Suisse boss John Mack, rising to global head of investment banking before taking responsibility for the firm’s relationships with corporate and sovereign banking clients. According to a source, the two men remain close.
The same source also says that despite his many years in senior management positions in banking, Ogunlesi fundamentally remains “a deal guy”, with a keen interest in the mechanics of the businesses GIP invests in. With that in mind, and also the fact that he is in close contact with the firm’s operating professionals almost every day, it is no surprise to hear him talk in great detail about Biffa using “six sigma tools to affect dramatic reductions in customer churn”, or GIP helping City Airport improve the “process flow” in the baggage area and shorten the queues at check-in gates.
To further illustrate the importance GIP places on the operational aspects of its investments, Ogunlesi quotes a statistic his partner Woodburn is apparently fond of reciting to his colleagues: an average of 90,000 man hours is spent on due diligence before making an investment; between one and two million man hours are spent managing the same asset, assuming it is owned for five years. “Where do you think your focus should be – the 90,000 or the million? To us it’s pretty clear where the real value is created. You’ve got to buy right, but then you also have to operate and manage the asset right to be successful.”
Grabbing the bull by the horns
Looking ahead, Ogunlesi is certain that infrastructure as an asset class is guaranteed to continue to grow. He says the magnitude of investment required, the financial constraints facing states and municipalities around the world, and the proven ability of private sector owner-operators to add value at the asset level make it inevitable that significant amounts of private capital will continue to flow in.
GIP is not the only private equity investor with a deep commitment to the sector. But the way it burst onto the scene with the largest first-time private equity fund ever raised stands out, and has clearly made an impression on the market.
The firm is widely considered a force to be reckoned with. A senior M&A advisor in New York describes GIP as “one of the few financial sponsors capable of taking on the most complex infrastructure situations; Bayo is a very forthright guy who can be introduced to any client.”
A London-based lawyer who advised one of the limited partners in the GIP fund says: “They have a serious grab-the-bull-by-the-horns attitude. When they decided they needed an in-house lawyer, they could have hired an associate with seven years’ experience who would never have made partner, but they didn’t. They asked themselves, ‘what do we really want from this role’, then went to hire a senior guy – as partner.” Joe Blum, GIP’s general counsel and the former head of the UK project development and finance group at Latham & Watkins, joined the firm in 2007.
Being global was part of the firm’s aspiration right from the start. “We think the ability to move strategically across regions is an asset. We want to invest in high-quality assets in the right jurisdictions at the right prices. Three of the investments we have made so far are in the UK, because we thought prices reflected good value there whereas prices being paid in some other markets like the US were extraordinarily high. Today we are looking at a lot of things in the US and Canada, because we think valuations have come down.” With outposts in Hong Kong and Sydney, the Asia-Pacific region is also on the firm’s radar.
There will come a point when the firm must resume its investment activity to get the remaining capital in its fund deployed. For the time being, there is no immediate urgency, and Ogunlesi is adamant that today’s challenging environment will create the very opportunities the firm is looking for: “If it was all a bubble like it was a few years ago, I’m not sure we’d find it that interesting.”
But even Ogunlesi’s patience won’t last forever: “There is a limit to how interesting you want the times to be, and we’ve had a lot of ‘interesting’ already. A little stability now would be good.”