Normal 0 false false false EN-AU X-NONE X-NONE

An unspoken argument between

Asia [with its ‘greenfield’ risk of the

developing world] and Continental

Europe [with its ‘brownfield’ stability]

was fought between two unlisted

manager visitors to Australia last

month. MICHAEL BAILEY

reports.

Talking up the benefits of

the world outside the US and

Western Europe, PCGI is a

private equity fund-of-funds joint

venture between former staff of

the US Government’s Overseas

Private Investment Corporation

[OPIC], and the Pacific Corporate

Group [PCG]. Its US$1 billion

funds under management to date

is principally from CalPERS,

the largest investor in a 12-year

closed-end fund which shoots for

a double-digit IRR, and offers

an ‘Asia Only’ pool as well as one

concentrated in Latin America and

Eastern Europe.

Meanwhile, AXA

Infrastructure is squarely

focussed on France, Italy, UK,

Spain, Germany and the Benelux

countries, and is up to a third fund

after raising €900million for two

earlier efforts, which has been

spent on 13 infrastructure assets

including everything from the UK’s

Anglian Water Group to Italy’s

Tozzi Wind Farms.

PCGI has “target regions”

which Steve Cowan, one of the

manager’s five co-founders and

co-managing directors, observes

represent more than 33 per cent of

world’s GDP yet today receive less

than 15 per cent of its total private

equity investment.

The target list includes

regions and countries which are

“developing” in every sense of the

word, but also a few which PCGI

thinks have private equity markets

whose growth is underappreciated

and can produce attractive

valuations.

Interestingly, Japan is on this

list [exposure in first fund: 2 per

cent], as is Australia. However

like most private equity investors,

Cowan won’t be committing any

more money here until Texas

Pacific Group resolves its dispute

with the Australian Tax Office.

PCGI likes its target markets

to exhibit sustained economic

growth, investment grade ratings,

sound fiscal and current-account

balances, sizeable foreign exchange

reserves relative to foreign debt,

and low corporate and consumer

de-leveraging requirements relative

to industrialised nations.

These target markets, which

include the usual suspects

[China, India and Brazil] but also

less prominent places [such as

Poland], are not expected to go

into recession and are forecast to

maintain a substantial GDP growth

premium to the US and Western

European economies, PCGI

believes.

PCGI was in Australia talking

to potential investors about its

Global Opportunities Fund No

2, which intends to follow the

template of the first in having 20

to 25 relationships with underlying

general partners. Cowan says

“indigenous firms” are preferred for

each investee country, a strategy

which PCGI is better placed to

implement than most, thanks to the

contacts made during the principals’

days at OPIC.

Cowan and his fellow OPIC

veterans spent years searching

the world for good investment

opportunities for the US

Government Agency. There is

an OPIC flavour to some of the

occasional co-investments which

PCGI will make alongside its

investee general partners.

A notable one is Arcos

Dorados, the owner and operator

of 1,750 McDonald’s restaurants

throughout Latin America.

“That really fits into our theme

of the emerging middle class in

most of our target markets,” Cowan

says. “McDonald’s in Latin America

just doesn’t have the political risk

you might think, because the stores

do everything they can to localise

their supply chains.”

In Europe, AXA

Infrastructure’s target markets don’t

have emerging middle classes and

can hardly be said to be booming

economies at present. But the big

factor in their favour, according to

managing director Laurent Fayollas,

is a healthy pipeline of deals

involving established infrastructure

assets promising stable inflationprotecting

returns, which indebted

governments are keener than ever

to privatise.

Fayollas acknowledges that

among Australian investors, the

European infrastructure story

faces a challenge to be heard over

the constant talk of Asia, and

particularly China, as the global

growth engine.

He points out that investments

in European infrastructure belong

to a completely different asset class

to Asian infrastructure, given most

deals in Asia will be for “greenfield”

sites, whereas 80 per cent of the

deals in AXA Infrastructure funds

to date have been “brownfield”, and

do not proceed without long-term

agreements with customers.

AXA’s infrastructure funds

typically have a 15-year, closedend

structure with leverage

levels around 75 to 90 per cent.

Fayollas said that for “public

private partnership” deals where

governments award managers a

contract to build and operate an

asset, a mix of 90 per cent debt

to 10 per cent equity is usual.

However for acquisition deals,

which may not involve the same

level of government guarantee, the

equity component is more like 40

per cent.

Fayollas said the valuations

of AXA’s infrastructure assets

“didn’t change” during the financial

crisis, and cashflows remained

steady. He emphasised the access

that the name AXA afforded

his team in Europe, although he

acknowledged a challenge for

European infrastructure investment

was the multitude of stakeholders

and complex capital structures it

sometimes took to get a deal over

the line.