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August 2008At The Cutting Edge ofInfrastructure InvestingGlobal Infrastructure Partners chairman Adebayo Ogunlesitalks investment strategy following GIP’s US$5.6bn close

August 2008 P3Americas.com 2At The Cutting Edge ofInfrastructure InvestingGlobal Infrastructure Partners chairman Adebayo Ogunlesi talksinvestment strategy following GIP’s US$5.6bn closeGlobal Infrastructure Partners (GIP) is following an investment strategy focusingstrongly on how best to operate infrastructure assets. It has the fortune of being ableto call on the vast experience of one of its founding partners, GE, which has long sincebeen at the cutting edge of best practice in a multitude of industries. Continuing toutilize this experience and make operating improvements at the assets it invests inshould stand GIP in good stead as the global economy heads for harder times.P3Americas managing directorRichard Kenton and executive editorPeter Allison met GIP chairman andmanaging partner Adebayo Ogunlesiat the fund's New York officerecently to discuss its investmentstrategy in more detail.If one thing separates Global Infrastructure Partners (GIP)from other infrastructure funds, it is its ability to tap intoone of world’s largest industrial multinationals and layclaim to some of the best operating minds in thebusiness. GIP, whose founding investors are GeneralElectric (GE) and Credit Suisse, closed its first globalinfrastructure fund in May this year.Investing in people might sound like a cliché but in a worldwhere infrastructure funds are no longer assured highreturns once an asset has been highly geared, the value ininvesting surely comes from successful asset operation.

August 2008 P3Americas.com 3GIP’s senior executives have a mix of industrial andinvestment banking experience. However, for AdebayoOgunlesi, the chairman and managing partner of GIP andthe former head of Credit Suisse’s global investmentbanking practice, while good banking skills are importantit is the multi-business knowledge and technicalcapabilities that really matter.“We don’t think the key to being successful ininfrastructure is financial engineering”, says Ogunlesi.“The real key to being successful has to do with how youmanage assets”.Dream TeamOgunlesi works alongside seven other senior executivesincluding Bill Woodburn, the former president and CEO ofGE Infrastructure, the GE business division that includesthe firm’s water and process technologies unit. It is nocoincidence therefore that water is a key target investmentarea for GIP alongside waste, energy and transportation.And it is no coincidence either that GE has significantdomain knowledge in two of the other three areas. Inenergy, the firm is the largest manufacturer of turbines forpower plants, a manufacturer of wind energy systems aswell as being active in the oil and gas sector. Intransportation, GE is the largest global lessor of aircraftthrough its GE Commercial Aviation Services (GECAS)business, and an aircraft engine manufacturer through GEAviation. It also manufactures locomotives for freight andpassenger rail applications. GE’s water business coversequipment manufacturing including desalination and watertreatment in addition to building and operating facilities.“When you think of three of the four areas in which wewant to focus, the ability to tap into GE’s technicalexpertise, operating capabilities and knowledge issomething we think is quite unique”, says Ogunlesi.The new owners have also paid considerable attention tothroughput time for security lines at LCY. Although arelatively small measure, it is things like this which makea difference in improving the overall quality of service.Best PracticeOgunlesi’s verdict is that applying industrial best practicesto an infrastructure asset like LCY provides a higherquality service to customers and ultimately translates intoimproved financial results. “When you think about airportsyou think about things like touch-time, cycle time andprocess flow,” he says. “All of these are concepts that weare now applying which is second nature to someone whohas run industrial and manufacturing plants.” Again, it isno coincidence that LCY chief operating officer ScottStanley, who joined the airport in November last year fromGIP with responsibility for its day-to-day operations, hasworked for General Motors, GE, Honeywell and UnitedTechnologies in operations and supply chainmanagement roles.In a year when Heathrow’s traffic was down and BAAendured the embarrassment of the Terminal Five opening,it comes as no surprise that LCY – in terms of passengervolume – was up almost 30%.Global Strategic InvestmentIt is this close attention to running an asset that hashelped determine GIP’s investment strategy. Ogunlesisays he is relatively agnostic about how the fund isallocated across energy, transportation, water or waste.“We look for good investment opportunities which fall intoany of those sectors,” he states. However, within thosesectors, GIP has adopted a different approach whencompared to some of the other infrastructure funds. InIt is easy to reel off the list of capabilities of one theworld’s largest multinationals but the proof of the puddingis in the eating.London City AirportIf evidence of GIP’s credentials as an operator wereneeded then the obvious place to look is the UK’s LondonCity Airport (LCY), which it acquired jointly with AIGFinancial Products (AIG-FP) in late 2006. Since GIP andAIG-FP have been working with the LCY management,the airport has invested over £30m (US$60m) in buildingfour new aircraft parking stands and reconfiguring thedeparture lounge.The GIP and AIG-FP team have also focused onturnaround time at the airport, and setting targets forreducing the amount of time aircraft spend at the gates.Cutting turnaround time means the need to spendadditional capex on new gates is avoided. “Get the planesout faster and you need fewer gates to service the samenumber of aircraft,” explains Ogunlesi.Adebayo OgunlesiChairman, GIP

August 2008 P3Americas.com 4transportation, for example, it focuses on airports, portsand freight rail. It does not invest in toll roads. The reasonfor this explains Ogunlesi is that it is questionable whetherGIP can achieve its target returns by investing in tollroads, and moreover, there is limited opportunity formaking operating improvements. “We don’t think there isa tremendous amount of scope to apply industrialpractices to a toll road,” he states, “and therefore wedon’t invest in them.”GIP’s approach to investing on a geographical basis issimilar to its sectoral investment approach. Once again,Ogunlesi says he is agnostic – in the non-committal senseof the word.CLOSING AUS$5BN+INFRA FUNDClosing a sizeable infrastructure fund in what isclearly a difficult financial environment is nomean feat. However, GIP pulled it off in Maywhen it announced close of its first globalinfrastructure fund with total commitments ofUS$5.64bn.The two founding investors, Credit Suisse andGE, each committed US$500m to the fund andwere able to get almost 100 institutions from 26countries to join them. Investors in GIP includeunions, public and private pension funds,sovereign wealth funds, corporates, insurancecompanies, foundations, universities, assetmanagers and a number of high net worthindividuals. This last category accounts forapproximately 7% of the fund.The highly successful fundraising shows anumber of things according to Ogunlesi not leastthat infrastructure is starting to becomeaccepted as a distinct asset classA total 40% of the fund’s commitments camefrom US institutions – the largest single country.“When you consider that the Canadians,Australians and Europeans understoodinfrastructure long before US institutions did, itis something of a surprise,” says Ogunlesi. “Wealso think it is quite encouraging.”The fund has offices in New York, Stamford (Connecticut),London and Hong Kong and is set to open one in Delhi.However, Ogunlesi says GIP will look at investing in anycountry – within limits – in both developed and emergingmarkets. “We deliberately set the fund up to look at thingson a global basis,” he says. Where to deploy capital forhim is a function of the climate and environment forinfrastructure investing and whether GIP can find goodcompanies and assets that give it scope to improveoperations. To date, the fund has successfully invested incountries as diverse as the US, UK, Argentina and India(see box).GIP’s preference for investing primarily in operatingcompanies and assets is likely to mean that it investsmore in developed markets than in emerging onessuch as China, India or Brazil where opportunities tendto be greenfield rather than brownfield, althoughOgunlesi says the fund will continue to look at optionsin these markets.In addition to LCY and Biffa, GIP’s acquisitionsto date include global port investor InternationalPort Holdings (IPH) and East India PetroleumLtd. (EIPL). Investments made through IPHinclude Great Yarmouth Port in the UK, acontainer terminal – also at Great Yarmouth in ajoint venture with PSA International, andArgentinean container terminal, logistics andwarehousing business International TradeLogistics (ITL).In June, the fund acquired the 830MW naturalgas-fired Channelview cogeneration facility inHouston, Texas for a consideration of US$500min conjunction with Fortistar. The plant, whichhas been operational since 2002, sells steam anda portion of its electric output under long-termcontracts with Equistar Chemicals, one of theworld’s largest polymers, petrochemicals andfuels companies.

August 2008 P3Americas.com 5The UK is KingIn terms of geographical exposure, the UK is currently thelargest single market for GIP. Between LCY, wastemanagement company Biffa which it acquired earlier thisyear in conjunction with Montagu Private Equity, andGreat Yarmouth Port acquired in 2007, the fund has inexcess of £1bn (US$2bn) invested in the UK.For GIP, the opportunity presented by Biffa is helping themanagement run the company better by providing higherquality service to its customers. Biffa provides wastecollection, treatment, recycling and disposal services toaround 75,000 UK customers in the industrial, commercialand municipal sectors. It is also one of the top threelandfill operators in the UK.In line with its strategy of following industrial bestpractice, GIP brought in the experienced Andre Horbachas CEO last month – formerly with a wind energycompany and 19 years at GE. Horbach succeeded BillWoodburn, who recruited him and had been acting CEOof Biffa since April.Ogunlesi is confident that GIP will find other investmentopportunities in the UK, including any that might arisefrom a possible break-up of BAA’s portfolio. “Any of theairports that BAA may divest would certainly besomething we’d want to look at,” he confirms.EMEA – Limited Potential?Elsewhere in Europe, Ogunlesi anticipates GIP will makeinvestments in the next year or so. He is cautious aboutthe Middle East despite talk of an emerging infrastructuremarket. On the positive side, the need for operating andtechnical experience to run assets plays to GIP’sstrengths and gives it an advantage. “The issue in theMiddle East is not capital,” states Ogunlesi. “What theyare looking for is operating capability”.However, the downside is that many of the opportunitiesare greenfield which does not fit with GIP’s investmentstrategy. In water and wastewater, for example, an areawhich requires hundreds of billions of dollars ofinvestment, the need is for new facilities. “We would loveto own a desalination plant or water treatment plant in theMiddle East,” says Ogunlesi, “but many of theopportunities are greenfield.”The opposite is true of the transportation sector wherethe majority of roads, bridges, ports and airports areowned by state and municipal governments.Ogunlesi recognizes the huge requirement for investmentin the US transportation sector but raises the concern thatprivate sector involvement in some aspects ofinfrastructure has not been as welcome as it could havebeen. Governor Ed Rendell and the state legislature arestill to agree a way forward for the Pennsylvania Turnpikeconcession and Texas ran into political opposition lastyear for its P3 toll road program. In these cases, the saleor lease of a state asset is as much a political as it is afinancial decision. That said, Ogunlesi thinks deal-flow willeventually come. “I’m not smart enough to know howsoon that eventuality is, but my suspicion is that it mayhappen slower than most people expect.”While toll road and bridge P3s have moved slowly, energyhas been huge. “Energy-based funds have not been shortof investment opportunities,” states Ogunlesi. “In the lasttwo years there have been between US$30bn andUS$40bn of transactions, maybe even more.” GIP isparticularly attracted to the US electric sector, saysOgunlesi. In June, the fund announced that it wasacquiring a cogeneration power plant in Houston, Texas.The 830MW plant has long-term contracts to supplysteam and electric power to one of the world’s largestchemical companies.Problems of US Airport InvestingIt might seem odd at first that an infrastructure fund whichowns an airport is not featuring in the competitive processfor the long-term lease of Chicago’s Midway Airport.However, taken in the context of GIP’s view of the widerUS transportation sector it comes as no surprise.Again, Ogunlesi recognizes the need for investment inUS airports and the lack of money in the public sectorbut says the problem is down to how the industry isstructured. There is a huge demand for investment, butEnergy not Roads in the USWhere Ogunlesi does see opportunities, however, is in theUS. GIP’s focus there is the energy sector, which has along history of private sector involvement.The fund sees more opportunities in US private-to-privatetransactions than with public-to-privates. “The US energysector has always been majority private,” says Ogunlesi.“Utilities are mostly investor owned and most of the oiland gas infrastructure and power generation assets arein private hands.”

August 2008 P3Americas.com 6US airports are different from European or Australianones which have actively involved the private sector. Inthe US, the airlines often own the terminal buildings atan airport. “Unlike LCY where we bought the runway andthe terminal, buying a US airport is different in terms ofhow the economics work,” says Ogunlesi.The Cause of Nightmares?The biggest fear for any infrastructure investor right nowis the global economic downturn and GIP is no exception.Ogunlesi’s overriding concern is stagflation – the toxiccombination of inflation with slow or negative economicgrowth. He acknowledges that the fund’s assets are notimmune to what happens in the global economy but theyare nevertheless well equipped to weather the comingstorm. GIP’s conservative approach to financing theassets it invests in means it should be well positioned toride out tough economic times. LCY is financed with analmost equivalent sum of debt and equity; it was acquiredfor around £770m (US$1.54bn) with the investorscontributing £370m (US$740m) of equity and borrowing£400m (US$800m). To fund the £1.7bn (US$3.4bn) Biffaacquisition, GIP, Montagu Private Equity and theirpartners invested £700m (US$1.4bn) and borrowed £1bn(US$2bn). “Those are the only two investments we havemade that have any debt financing,” says Ogunlesi,“everything else is all equity.”Given LCY’s customer base, GIP is naturally sensitive toa downturn in the financial services industry or companiesin this sector moving out of London to the Middle East orAsia. Ogunlesi’s view, however, is that this is just part ofthe curve that any long-term investor must contend with.“We think LCY survives the downturn because of thevalue proposition it presents to airport users andpassengers as well as airlines” he states. Ogunlesi isequally optimistic about the waste sector, which he saysis less affected by recession and should continue to growwith population. “The story is the same for all of theseassets,” he says, “if you finance them conservatively,focus on improving operations and the quality of serviceto customers, and hold them, you go through thedownturn and come back on the upturn.”Downturn or upturn, GIP is already featuring as aprominent infrastructure investor and is set to do so in thenext few years. Its attention to industry best practice inmanaging assets as well as the nature of the fund – it is a10-year fund – means that it will be an active investor. Itis a different philosophy than adopted by other funds inthe infrastructure space and the test of its success indelivering value will come when it starts to contemplatean exit from assets like LCY.One suspects that investors in the fund will not bedisappointed.Copyright © Inframation Ltd.Reproduction, scanning into an electronic retrieval system,or copying to a database is strictly prohibited withoutthe written permission of the publisher.Inframation Ltd is a privately owned financial media group, which publishes bothInfra-News & P3Americas. To view the latest infrastructure headlines visitinfra-news.com & p3-americas.com.Editor, Peter Allison, pallison@infraresearch.com. General enquiries: +44 207 739 0013Copyright © P3Americas August 2008