antin's meticulous plans for fund two - Antin Infrastructure Partners

ISSUE 32 | MAY 2012 | infrastructureinvestor.com
FOR THE WORLD’S INFRASTRUCTURE MARKETS
For us the
management
fee is all about
reinforcing the
team
ANTIN’S METICULOUS PLANS
FOR FUND TWO
OPERATIONS
How complexity is changing corporate trust
REFINANCING BOOM
Why the likes of ING are optimistic
CONTROVERSY IN CANADA
SNC-Lavalin fights for its reputation
Q1 2012 LEAGUE TABLES
Japanese banks grab market share
BENELUX
Debt providers: notable by absence
PLUS:
Our Mexico Intelligence Report 2012

alain rauscher & mark crosbie,
antin infrastructure partners
If it ain’t broke,
grow it meticulously
Alain Rauscher and Mark Crosbie take Bruno Alves inside Antin
Infrastructure’s high-performance machine, talk about the importance
of having a sizeable team and explain why Fund II won’t be a radical
departure from Antin’s first venture
photography by andrew wheeler

page 23
keynote interview
The word “conservative” gets bandied about a lot during
my two-hour sit-down with Alain Rauscher and Mark
Crosbie, respectively the chief executive and managing
partner of Paris-based infrastructure fund manager Antin
Infrastructure Partners (Antin).
In a way, it’s only natural. Every infrastructure fund manager,
especially since the 2008 global financial crisis, wants to be seen
as conservative. To borrow a Gallicism, it’s de rigueur these days,
especially if you are about to start fundraising. But I think
there’s a word that better encapsulates what Antin is about.
I didn’t actually count the number of times Rauscher and
Crosbie said the word “conservative” during our time together.
But had they been in my place, I suspect they would have
known exactly how many times that word had been uttered.
And that’s because the management team at Antin is nothing
if not thoroughly – even exhaustively – meticulous. That’s the
right word, I think.
AnGUisH
When Rauscher says, halfway through the interview, that “in
the very early days I used to wake up in the middle of the
night in anguish and think ‘Where’s the pipeline, where’s the
pipeline?’ because I used to worry whether the deals would be
there,” you have no problem believing him.
So it’s not entirely surprising to find that Antin’s second
infrastructure fund – which the two heads say, cautiously, should
start fundraising this year – was planned way in advance.
“We are about two-thirds invested for Fund I and we have
a 75 percent investment threshold which triggers the launch
of a second fund. So we are not quite there yet, but given the
current pipeline, we expect to be there in the next few months
and consequently go to market with the new fund by the end
of this year,” Rauscher says.
“You can never be absolutely sure, because at the end of
the day we have to focus on making good investments and
that tends to have a pace of its own,” chips in Crosbie. “We
find that proprietary deals tend to take longer and that’s why
we are not being so precise with the timing,” Rauscher adds.
Antin finished raising its first infrastructure fund in late 2010,
bagging €1.1 billion from 35 investors based in Scandinavia,
France, Germany, Switzerland, the UK, Canada and Australia.
Along the way, it’s been investing throughout Europe and
grabbing its fair share of headlines thanks to chief executive
Rauscher’s impassioned defence of the general partner’s
(GP) role in infrastructure investing and its right to charge
appropriate management fees. This year, Rauscher won
Crosbie (l), Rauscher (r): new fund planned to launch soon

page 24 infrastructure investor may 2012
keynote interview
Infrastructure Investor’s debut Personality of
the Year award – voted on by our readers
– precisely on the strength of his defence
of the GP role.
Because of that defence of the GP
position, Rauscher may not take the award
around with him to limited partner (LP)
meetings when he starts raising Fund II.
But joking aside, there is little reason to
believe Antin’s LPs – current and future
– would be put off by the accolade.
“Yes, we’ve had some very good signs of
support from our current LPs, plus from
investors which have not invested in Fund
I and very kindly told us they now regret
it. So we are pretty hopeful that we will
have a good amount of money invested
by current LPs in our second fund. It all
comes down to our performance – and I
think our performance has been fantastic
so far,” Rauscher points out.
HiGH performAnCe
Antin’s “fantastic” performance is the
other side of the fund manager’s story
and the main reason why Rauscher is so
outspoken in his defence of the quality
GP’s ability to charge its fair share of
management fees.
I think you can buy
the same asset and
basically get radically
different returns
“Broadly, we recorded a cash yield
in 2010 of close to 7 percent and
above 12 percent in 2011. And based
on the two-thirds of the fund we have
invested, we are targeting a cash yield
in the same range for 2012. This relates
to investments which have target IRRs
[internal rates of return] of between 15
percent and 25 percent to 27 percent.
That’s why we feel strong support from
our LPs for Fund II – it’s not just for our
nice smiles,” Rauscher quips.
Those are strong numbers – not just
in comparison with Antin’s peers, but
even when put alongside its internal
benchmarks of 5 percent yield and 15
percent returns. So how does it extract
that sort of value from its portfolio?
“First of all, you have to buy
well, identify the right assets and be
uncompromising. One of the things we’ve
always done is to make sure our assets
get what bankers would call infrastructure
financing. And infrastructure financing
means that you can pay dividends straight
from year one, whereas with an LBO
[leveraged buyout] type of structure, you
don’t get yield throughout the life of the
asset and all of the value is at the end,”
Crosbie explains.
“It’s very important to buy well,”
Rauscher stresses. “Some people say:
‘As long as I can get some 4 percent to
5 percent yield I’m very happy to pay a
high price and just get a 9 percent to 10
percent IRR. We don’t share that view.
By thinking this way you destroy an
enormous amount of value – because
there is no reason to buy an asset at 8
percent return if you could reasonably
buy it at 15 percent. We don’t take more
risk, we just stick to our discipline and
we price risk at the appropriate level to
deliver optimal risk-adjusted returns.”
“And that’s why we tell our LPs that
these [high] cash yields only work if we
maintain our returns discipline, otherwise

may 2012 infrastructure investor page 25
keynote interview
you destroy value, giving LPs a very high
yield in the short term, but not creating
value,” Rauscher says.
“That’s why we are obsessed with
delivering high IRRs and money multiples
that are consistent. Typically, we look at
delivering 15 percent-plus IRRs and twotimes
money multiples when we look at
a project, based on an average period of
six years,” he explains.
BUy witH HiGH eXpeCtAtions
Part of the reason why Antin is so obsessed
with high returns lies in its inherent
conservatism. “If you say, I’m prepared
to buy at a low IRR because I’m a pension
fund, and you buy at 7 percent or 8
percent IRR, and then anything adverse
happens, you lose everything. If you buy
at an IRR of 14 percent or 15 percent
and something adverse happens, you
then have a buffer and you still continue
to make some decent money,” argues
Rauscher.
Crosbie summarises: “So we make sure
that we find assets that are cash generative,
we buy them well and we structure the
debt in a way that allows us to extract cash
yield. We are also very active investors,
definitely at the more active end of the
infrastructure asset class in terms of how
we operate.”
“We don’t just turn up for board
meetings once a month and get the
report and then go away. We are very, very
engaged with our investment companies
every week and we are deeply involved in
strategy, direction, management, capital
expenditure, working capital – a whole
range of different things.”
“We are very hands-on,” agrees
Rauscher. Not hands-on in the sense that
Antin goes into Porterbrook, one of its
portfolio rail companies, to manage its
fleet of trains. But hands-on in order to
be absolutely sure that “we get the right
management people in place that can
deliver on our strategy,” explains Crosbie.
“And if we haven’t got the right people in
place from the outset we take decisions to
What are the biggest
risks? I think they are
probably governmentrelated
change them and get the right people,”
he adds.
In Antin’s world view, there is no such
thing as a boring infrastructure asset. As
Crosbie puts it, “these are real businesses
with real challenges”.
If you’re reading this and thinking
Antin’s approach to infrastructure
investment and the business of running
companies sounds too much like a private
equity outfit’s – a somewhat dirty word
in the post-crisis world of infrastructure
investing – rest assured you are not the
first one.
“In the early days of the asset class,
many LPs thought that infrastructure was
like real estate – it was about paying cash
yields and returns were not important.
We came along with our model and some
people said: ‘Look, this is not really what
infrastructure is about; you guys are really
a private equity-type fund,” Rauscher
admits.
Which prompts the obvious question:
Are you an infrastructure or a private
equity-type fund, then?
“Well, infrastructure is private equity.
We just so happen to concentrate on three
specific sectors – energy, transportation
and telecoms – which just happen to
be specialised sub-sets of private equity.
The only difference, after the sub-sets,
is in the financing structure, where noninfrastructure
private equity investors
tend not to be so concerned about taking
a cash yield and therefore go for LBO-type
financing,” Crosbie argues.
Rauscher explains it another way:
“I think you can buy the same asset
and basically get radically different
returns. Take this building. It used to
be owned by an insurance company
which frankly was just looking for yield
and didn’t put in a lot of work. Now it’s
owned by another company and what a
difference: they refurbished everything.
Of course they invested a lot of money and
upped the rents accordingly. So while the
previous landlord made some 5 percent
or 6 percent IRR the current one will
probably at least double that.”
not so BorinG
The point Rauscher and Crosbie are
driving at is simple: infrastructure isn’t
necessarily a boring, low-yield and lowreturn
asset class – although it certainly
can be that. To get a lot of value out of it,
you have to put in the legwork – and that’s
where a good GP can add tremendous
value.
Take refinancing risk, a pet subject
for Antin’s management duo.
“To be quite frank, I think many LPs in
the early days underestimated refinancing
risk, which we think is an enormous risk. If
you compare our cash returns with many
of our peers, you will find that the reason
why in some cases they have cash yields of
close to 2 percent is because they didn’t
plan sufficiently well for the refinancing,
and so cash sweeps kicked in and there
was no cash to be used,” argues Rauscher.
“A 10-year fund like ours typically
has an average investment life of around
seven years. So if you went back five or six
years, it was very easy to get bank debt that
was seven years-plus, meaning you could
finance your assets and you would have
no issue with refinancings during the life
of the fund,” Crosbie begins.
“The big change after 2007,” continues
Rauscher, “is that a manager today will
be exposed to refinancing an asset once
if not twice during the holding period.
So the skills involved in refinancing are
extremely important and you need to take
a clear view – before you buy into the asset
– about the ‘refinanceability’ of the asset.”

page 26 infrastructure investor may 2012
keynote interview
He adds: “Whenever there is a
refinancing, we tend to organise ourselves
at least two years before the deadline to
cater for this risk. This also explains why
we have such high yields.”
strenGtH in nUmBers
Of course all this hands-on management
requires a great many hands.
“When we started raising Fund I we
had seven core team members and some
15 to 16 people at close – we now have 23
people,” Crosbie says. “We raised more
money than we originally intended for
Fund I, so we invested in building a bigger
team. We think we’ve got one of the best
teams in the industry.”
Elaborates Rauscher: “We really
have two riches: one is our team and the
other our LPs. We don’t compromise on
quality people. When we found that we
would raise more money than originally
intended we told our LPs that we would
invest the extra money in people. When it
comes to Fund II, it’ll be exactly the same
story. And for us the management fee is
all about that – reinforcing the team.”
Looking at the size of Antin’s team,
one is struck by some forceful facts: this
is a team of 23 people, based in Paris and
boasting some 10 nationalities, managing
a current portfolio of some €750 million,
looking to invest another €350 million
and, eventually, begin raising a new fund
toward the end of the year.
Compare that with the 12-person
team managing the Caisse de dépôt
et placement du Québec’s $6 billion
portfolio of 20 or so direct investments
– which returned a very respectable 23
percent last year – and you get a good idea
of the sheer numerical strength Antin
brings to asset management. However,
Rauscher and Crosbie hasten to highlight
that it’s not just a numbers game – it’s also
about alignment.
“In our team, everyone who is
involved in investing – and quite a few
people supporting the investment team –
are invested in the carried interest of the
fund,” Crosbie points out. “So when you
have this meeting room full of people of
all levels, everyone is intently interested
in how the assets are performing because
it’s their money at risk as well – it’s not
just the partners’ money.”
“We also have two more rules to make
sure people are accountable for what they
do,” Rauscher says. “The first one is that
the people involved in the acquisition of
an asset remain exposed to it up until the
time we sell it. The second is that we always
have two partners sitting on the board of
every investee company – in addition to
investment directors, associates and the
like – attending all meetings related to
these assets.”
The rationale for this, Rauscher states,
is to foster a culture of accountability and
transparency. “Of course there could be
problems [with these assets]: life is not
always simple and smooth,” Rauscher
acknowledges. “That’s fine. But we don’t
want problems to be hidden and only find
out about them when it’s too late.”
worst niGHtmAre
Speaking of problems, what is Rauscher
and Crosbie’s worst nightmare – the type
of scenario that could derail all of their
hard work?
“Obviously, we modelled our
portfolio very carefully and took care
not to double-up on particular risks,”
Crosbie starts, before pausing, and for
the first time, the duo stammer a bit for
an answer.
“What are the biggest risks?” Crosbie
muses aloud.
“I think they are probably governmentrelated.
These days we are living with
much bigger macro risks, which cause
governments to be short on capital and
consumers to put pressure on politicians.
And that results in regulatory action, tax
action, those sorts of things,” he answers.
“If you build a diversified portfolio,
you can mitigate risk,” Rauscher offers.
“And we bring the whole weight of our
partners when we make investment
decisions – not just the sector specialists.
If we find any of them have reservations
[about investments] we ensure we address
everybody’s concerns. And if we can’t fully
answer every partner’s concerns, then we
don’t invest.”
Spoken like a conservative – and very
meticulous – infrastructure investor. n