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The Infrastructure Investor Podcast
Igneo: 'I don’t want to be on the phone to clients explaining why our valuations dropped'
00:26:56
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- [00:03]
A
Hi, I'm Bruno Avos, Editor in Chief of Infrastructure Investor and welcome to the Infrastructure Investor podcast. In today's episode, I sit down with Niall Mills, Global head of Igneo Infrastructure Partners. Igneo has been a mid market investor since 1994, so has been in the market for a very long time. As a result, it's one of the first managers on the show that has gone through a full fund realization. And, and Niall and I spent some time dissecting what that exit process looked like for its first 2009 European vintage. Along the way we touch on auctions versus bilateral processes, why Igneo chooses to do quarterly valuations for its LPs, what the Mid market looks like these days, and much more. Hi Niall, welcome to the podcast.
- [00:55]
B
Thank you, Bruno. Nice to see you.
- [00:57]
A
Good to see you too. So it's a bit of a treat for me because actually you are one of the rare managers that we're having on the show that has actually gone through the process of winding down a fund. And I'm referring of course to the 2 billion European Diversified Infrastructure Fund 1, which is a 2009 vintage that you fully exited in 2024. And so I want to spend some time going into this and my first question to you would be looking back, how much of that exit process went according to plan or did you find that actually the way the wind down happened was different to what you originally envisaged?
- [01:39]
B
It's a really interesting question and it is something we have learned a lot about by going through the process as well. Just to remind you, we had a five year window to exit the fund, agreed with our investors, we went through a voting process and a consultation process, very engaged with our investors, decided that it was the right time to exit the fund and wind it up, but in a very orderly way. And five years is quite a long time. It gives you time to think and time to plan, time to look at market conditions and you know, the buyer universe as well. And I suppose the nice thing about five years is that you're not under pressure. And I think one of the lessons that we took away was you don't want to be under pressure to exit. You want to be able to plan it really well, have the advisory community out there knowing something may be coming to market, but not feeling that you have to get it done by say the end of the year or the following spring or something. So that was good. I think the second thing that we learned was selling a business takes a long time. It's very time consuming. You're Working with management teams on business planning. We generally have a very collaborative relationship with our management teams so we want to take them on the journey, which means you're going through different iterations and understanding opportunities or risks or the way the market might perceive the business. You're working with advisors, you're prepping, you're getting ready. It's all very, very intense and it consumed more resource than we anticipated at the time. So we've learned from that, which is good. I think the other thing, and I hope some of your listeners might be interested in this, was the market in general has this view that a bilateral deal is better than an auction. So you know, there's some managers out there saying all of our deals are bilateral. Well, I suspect that's not strictly correct. They might be bilateral at the very, very end when there's only one party, but you know, which is not quite bilateral but anyway. And that auctions are ugly and evil. And evil. Not true. Not true at all. If you've got a really good angle when you're acquiring something, an auction can be perfectly okay because your angle can give you a competitive advantage, which means you can be better on pricing, you can manage and quantify risks better and win an auction perfectly okay. There's nothing wrong with a good auction. If you're going into an auction with no preparation, you've got a problem, you're probably going to lose or you're going to take some very risky bets. Similarly, for exiting, very interestingly, I mean, one or two of our best exits were actually bought during an auction and sold bilaterally.
- [03:59]
A
Okay, it's really interesting, very interesting.
- [04:01]
B
Yeah, it's almost counterintuitive, but we've achieved in some cases exits at 27, 28% RRS. And there were auction acquisitions and bilateral exits. If you've got a really good understanding of the value of your business and you understand your business plan and the future risks very, very well and you get a bilateral approach that values those things a lot more highly than you would. You should take it seriously. So we're very open minded on the best way to exit the business. But timing the value that the market gives you, whether it's bilaterally or through an auction, is obviously incredibly important. And then it takes a lot of time and effort to manage your way through from early stages through to successful exit. And lots of things can go wrong or go very well during that process.
- [04:46]
A
Let me ask you a couple of questions just from hearing you because the auction versus bilateral issue that you just raised is quite interesting. But I guess you guys learned that lesson or did you yourselves have sort of a prejudice going into it? You thought we don't want to do auctions and then you learned better or you were really open minded from the beginning and this was just a way
- [05:03]
B
of other way around. Bruno. I mean, I suspect going into it we expected we would auction everything. Yeah, yeah, yeah, yeah. You know, there's the old case where you think, well, that clearly should be part of, you know, either an aggregator or a platform or a big strategic. And you sort of position it for that kind of thing. But I think in general, if you asked us on sort of day one of that five year process, I think we probably would have said we'd expect that most of this portfolio is going to be auctioned. And it wasn't.
- [05:32]
A
Okay, so a bit more resource intensive. It was maybe one of the lessons. But the five year period you envisaged, I guess that is something you're going to keep, if I'm hearing you right. Right.
- [05:41]
B
That that worked well or it did work well. Yeah, it did. And look, I think we always discuss with our LPs about exiting businesses because the truth about evaluation is the moment of truth is when you sell a business. Whether you're selling a secondhand car, whether you're selling your home, whether you're selling a big infrastructure asset. Your moment of truth is the value you realize when you exit the business. Thankfully, for our first fund, every single asset was sold at above valuation. Every single one. There was nothing where we took a lockdown or reduced valuation on exit and in fact the average was 50%, which is very substantial. But five years is good. But we'll also, you know, if we get a really attractive approach or an opportunity or we feel that the market is primed for an exit, we'll also look at exiting before that time. The judgment day is at the end of the fund where you can say to your LP base, this is what I've returned to you over the life of the fund. A couple of examples. You know, we exited the UK water sector at least a couple of years before the market started to, and we achieved a very, very good risk return on that investment. We would not have achieved that if we hung around for two or three years. So we're always challenging ourselves on. Hang on a second, you know, hang on a minute. Is this the time to think about it? What's happening with this? What's happening with that? Is it still growing as expected? Are things changing? Is there more to come? And I think that's Very important to get that time well, to get the timing as right as you possibly can.
- [07:07]
A
Yeah, and actually I'm going to frame this for our listeners, but obviously all these figures are public. Edif1 did very well. You returned circa 5 billion euros to your investors. That's an average money multiple of 2.6x. You generated a 12% net return against your 10% target. So I just want to try and unpack those numbers a little bit. And when you look back at that 10 asset portfolio, tell me what was kind of the balance between buying well, so a good entry valuation, then kind of working to optimize those assets and then sort of exiting well, also when you look at that, how did this balance out between these elements?
- [07:47]
B
You won't be surprised to hear, Bruno, that we spent a lot of time looking at that even before we exited the fund. It's a probing question and the right question to ask. I think it is a mixture. I mean, clearly buying well has been incredibly important. There were some assets we bought better than others, for sure. There were some assets that, you know, we bought at the right time. There were some we maybe bought at a different time when, you know, there was a bit less value. But I think timing is important. If you overpay for something at the outset, you've got a massive problem. It's a steep hill you're climbing after that. It's not impossible, but it's very, very hard. We always took a very conservative approach to financing. And if we go back to the beginning of this fund, I think in general in the sector leverage was higher, some for early deals, the gearing was much higher. But we took a conservative assumption and the models always assumed that long term capital market rates would return to the average rather than stay low. So we did benefit from the lower interest rates post GFC and they stayed longer than we expected. So that was good, that was upside. But I would never ever underestimate the, the value generated by really managing the businesses very well. And I would also never say that we did all of that. We built great management teams. There was a lot of change in some of the businesses. You know, I've got one where we had five different CFOs in a decade. But ultimately we get the right team, we collaborate with and we build a team with the management team. We embrace technology we thought very carefully about and investment, we accelerate investment. In many cases. We supported the better supply chain management, we supported better regulatory management. So working much more closely and collaboratively with regulators and all of that generated a lot of value and then the last point, the exit point, I think we did get the timing right in some of the exits. So if you add the timing of returns, the value generated with really good hands on operational management. So this is, you know, not using operating partners kind of as non executives, but having people in the team that have been former CEOs that are deeply embedded in the transaction process and running the businesses. Good use of technology, good use of long term planning, great management teams, buying at the right price, you know, they're the ingredients to make a good cake. That's what we tried to do and it did vary from asset to asset. You know, we won one business where we put in place 20 year and 30 year financing. You know, we got 30 year financing at about 2% because the market was wide open for it and 30 year money at just over 3% and it's fantastic value. And of course what that delivers is an opportunity to then just focus on running the business really well because there's no risk of, you know, not financing or no risk of not being able to repay your, your debt. You're on to accelerating construction, you know, building in technology, improving customer service, improving environmental protection, all of which adds value, but on a platform of a very stable, very well executed debt strategy. So they're all mutually complementary. Yeah.
- [10:48]
A
And hearing you, I'm also thinking maybe slightly unfair question, but how much of it do you feel is repeatable? Obviously something like the interest rate environment that was caught in those post GFC years. We're in a different world now, more back to normal. But was there anything like a certain type of asset that you felt you could buy at a certain price point or even just starting investing in that 2009 post GFC period stuff that you think, oh, okay, well I did that really well, but I can't do it that easily anymore or in other vintages. Is there anything that jumps out?
- [11:20]
B
Well, I think maybe a flippant answer, and I don't mean to be flippant in any way, but we've repeated the performance in the second European fund. The performance in the return is just as good and some really strong assets in there. So I think it is repeatable. But your blend changes probably moved away from what would have been a portfolio quite heavily influenced by regulated assets. And we're not the only manager to say that. But regulation has become much more risky than the market thought it was 15 years ago. I always said it was risky. I always said it was much more risky than people think because it's political. Whether you think they're independent regulators or not? They still work for a government. So there's much less regulation in the portfolio. There's still a bit of. And regulation in the right environments is perfectly okay. We've got more platforms these days where we're buying smaller, not small, small, but smaller. And then bolting on additional opportunities at a better return. But with the same management team, that's become a really successful strategy for us. It does involve probably a little bit more hands on asset management. So you know, some of the very senior former CEOs, asset specialists within the team are more hands on in the early stages. Because if you're buying fairly small, you probably don't have the capacity to have a world class asset team in place on day one. But you can build it over time. So that's changed a little bit and that definitely shows an opportunity to outperform. I also think the market has opened up. There's more, there is more opportunity in the market. 10 years ago data didn't exist. For example, 10 years ago there were very few district heating businesses on the market. There wasn't an all flood of renewables. Renewables is very new, wasn't it? It's remarkable the speed that European economies have adopted renewable technology. Great, but remarkable the speed it could change. So I think it is repeatable and I think our track record is very strong in doing that.
- [13:08]
A
Well, a couple of things actually that I wanted to pick up on because one thing you just mentioned was in relation to edif, one was basically exiting above, or quite a bit above even what the, the assets were valued at. And I also remember immediately after you kind of ended the exit process for Fund 1 and infrastructure investors spoke to you, you mentioned something which caught my ear, which I found very interesting and it was that Igneo does independent valuations of its assets and it does them on a quarterly basis and somewhat conservatively from what you're telling me, versus the exit prices. But that decision to do this independently, to do it quarterly, was. Where did that come from? Was that Igneo? Was that your LPs? Was it both?
- [13:54]
B
Well, that's really. I've never been asked that before. So Bruno, it's a ton of work. Doing quotient calculations is a ton of work. And we use a number of different valuers because a bit like auditors, we do like to rotate them, you know, every three to six years. There's a very healthy rotation policy to make sure we're not stuck to the same one. They all value the assets in different ways. They've all got their half style and their half way of doing things. And so it is a lot of work. But it really comes from in the very early years of EDIF1, there were some questions in the market. Well, there were a lot of questions in the market about valuing assets. How do you do it? There was a lot of manager valuation was even managers using independent valuers, but sculpting the cash flows before it was sent to the independent valuer. And a bit like our philosophy on, you know, we don't charge any fees on drawn capital. So until capital is put to work at zero fee, I think it's really hard to look an LP in the eye and say we're going to charge you fees from the day you commit, even though we're not putting the money to work. So a bit like that philosophy where we're trying to be very transparent, work with our clients, our LPs in a very collaborative partnership way. It was also important to us to show that we'd listened to the market and we didn't want to be in the same bracket of having our valuations questioned. Now that's all noble and easy to do. As I said, it's a lot of hard work and it's not straightforward. I think one of the reasons that we've seen, and it's not exclusive, but one of the reasons that we have seen, you know, a significant premium on the valuation is that in our business plans we value the businesses for the long term, right? So we're running the businesses to 25, 30 year models. As a result of that, we're not anticipating an exit. So we're not building in a big exit premium. We're not really doing mark to market comps on recent trades. We look at them, but it isn't a basis of valuation. So we saw cost of financing drop and stay low for a long time. We've seen people paying higher premiums for some assets as well. That wasn't influencing our underlying value. So that's upside that we like to see. We also have never taken aggressive assumptions on growth. We've never banked upside until it's been delivered. So even though we may have had a management plan that we approved at the board that showed we were going to grow by X or deploy X or embrace whatever new technology or whatever until that was actually delivered and we saw the benefits, we didn't build it into evaluation. So all of those things kind of point towards that. Our valuations are going to be conservative. We've got over 200 global clients now and growing, growing quite rapidly at the moment, which is, you know, a first world problem. But it's still, it's a challenge at the moment. But I don't want to be on the phone or going to visit some of those clients on an annual basis like we try and do to explain why evaluations dropped or it's wrong. I don't want to be going to speak to them at all after an exit to say, well, we told you it was worth X and we sold it for 15% lower than that. They're difficult trust breaking conversations. And whilst in the early days we took the decision because the market was questioning valuations for sure and there were some case studies at the time that looked a bit, well, they were lacking transparency, let's put it that way. I think the industry has moved an awful lot further on these days and changed, but it was the right decision. When you look back and, you know, I think that's why we still do it. You know, we have challenged ourselves many times, should we move to 6 monthly, should we move to 12 monthly? But it's the way we do things, we're happy with it. So why change?
- [17:20]
A
I mean, it's interesting to hear you say all this because I do think there is still a decent, healthy, live debate about valuation practices in private markets. And now when you hear a lot about the democratization of private markets, that I think goes even higher up the agenda. So I'm just wondering if you either hear it from LPs or you have an opinion yourself as to the wider state of market practices regarding valuations. And I'm just thinking about what the usual criticisms are and it's things like valuations being infrequent or based on inputs that can be stale, like discount rates, not updated, et cetera, or volatility that gets kind of botoxed away. What do you hear? What do you think about that general state of play?
- [18:04]
B
Bruno? I think all of that's true. I think there are sometimes overly aggressive assumptions. I think there are sometimes managers not wanting to face up to the reality of the value of their underlying. Businesses have changed. There's hope, you know, hoping that things will get better. They rarely get better. They normally get worse. If you've got problems right now, that's true in life, isn't it? And I openly say quarterly valuations is a lot of work and takes a lot of time. But I think if you're only valuing once a year or even less frequently, I think that really questions, are you doing the right Thing for your underlying LP base and you know, as we democratization of the sector, as we move towards more needs for liquidity or more needs for more frequent pricing because of your client base, I think it forces you into taking the evaluation process really, really seriously. Unless you're approaching exit in which case you're saying to the market we will have an accurate price for this in the next six months.
- [19:00]
A
Wanted to switch gears slightly because I also want to get your take. You've been in the market for a long time, you igneo and you've been mostly in the mid market. And the mid market to me is kind of another concept that you know, it's first of all it's getting a lot of attention. It seems like it's always getting a lot of attention, but I'd say it's nowadays gets a lot of attention really but somewhat fluid sometimes or feels that way with investors of different shapes and sizes kind of all claiming to be mid market. So while I have you, I'm kind of curious in your opinion, what are the fundamental characteristics of the mid market and what maybe isn't mid market?
- [19:37]
B
It's very topical at the moment, isn't it? I mean, I hope we're regarded as one of the best mid market managers in the world. Our track record is very strong, very consistent. I mean for us, when your equity check is approaching a billion euros, you're getting into large cap. Even before that, you've got to ask some questions. There are examples. We have a business in the UK that was two separate energy from waste businesses that we bought through two separate processes merged into one. I suspect the exit for that business is to large cap or to a strategic because it's bigger. It wasn't an acquisition. We've also had some platforms that have grown into definitely kind of, you know, large cap targets for for exit, but lots that have just stuck in that 3, 4, 5, 600 million equity check. You know, I think if you're below a couple of hundred million, you're definitely small cap. You are. It's difficult to argue otherwise when you're up in that 8,900 billion and above that your large cap. I think you do need to keep an eye on the business plan. Where is the business going to grow. And it is possible that you can grow into a size that's too big for a fund. We always look at that and we always think right, you know, if this all happens, works out well and there might be great value associated with it, but do we have the ability to sell or exit Parts of the business. That's the factor that we look at. We look at if an asset does grow to a certain size, does, does that make it more attractive to large cap? And in some cases the answer to that is yes. But if it isn't, why are we doing it? So you know, it's a very dynamic process on us, self checking both the initial size of a deal but also the business plan of where we hope to take it to. And you know, and in many cases, you know, there's some absolutely fantastic large cap managers out there, you know, really high quality management teams. You've interviewed many of them. And in some cases large cap is a fantastic exit route for us and also a great opportunity for some of the large cap managers to acquire, require a business off more scale, but maybe it's going to continue growing and it suits their strategy really well. So you know, even if the returns may, and you can only look at these things on a deal by deal basis, but if the returns are slightly lower in large cap world, maybe the opportunity to keep growing, that business delivers exactly what that fund wants. But I think as well, you know, the mid cap size equity with a lot of technology risk or a lot of growth risk, it's not core core plus that's here you've moved into the value add space and a mid cap ticket at a value add return is a lot more risky.
- [22:01]
A
Yeah, well it's actually funny you said that because that was another thing I wanted to sort of pick your brain on because looking across your portfolio.
- [22:09]
B
Yeah.
- [22:09]
A
I think it's fair to say you're remarkably in the realm of what one could call real infrastructure still. So, you know, core, core plus, et cetera. So you've given a hint of what maybe what you don't want to do, you know, to stray outside of that. But I'd be interested in hearing more and even if you felt a bit pushed into sort of climbing up the risk spectrum or whatnot, but just your general view there of being able to keep within that space, we promise our
- [22:39]
B
investors who trust us with their money, we promise them that we're not going to have any style drift. And in the 18 years that I've been with the business, we have not had style drift. The industry changes, there are thematics that come and go a little bit, but we haven't drifted into to higher risk, we haven't drifted into large cap space. So that's a really important promise that we're not going to break. But in terms of the sort of strategy, we do like businesses that we can see and touch. We like real assets. We like businesses that have customers that are operating, they've got a track record of operating. We love great management teams. It's a privilege to work with some of the management teams that we work with. You know, these are really, really important points. You know, we don't like sort of popular themes. You know, we've got a fiber business in Germany that's doing really well. Highly profitable partnership with Aeon. Perfect, you know, great supply chain relationship with the Aeon supply chain, which is highly valuable. Customers connected, all good. We looked at 17 different fiber opportunities before we acquired that one. When the market was saying you need to get fiber, we were actually under pressure from some of our LPs, you know, are you missing the boat? We said, no, no, we're not, we're not. We're just not happy. You know, we have a couple of data center businesses in our other funds in Australia and in North America. We haven't successfully acquired a data business. In Europe we've tried on a couple of occasions and been quite substantially outbid. Some of the multiples are just, they're just hard to get your head around. So we are very cautious in that. And it goes to my earlier point, you know, we underwrite on, you know, what's the worst that can happen? What happens if we lose this? That's switched off. That's switched off. This change happens. What happens to the debt, capital markets? How does that affect our case? What are we underwriting on? And we don't want to be underwriting a potential negative case. We don't want to be losing money. And you know, I think our LPs will, they can see, they understand, they're very sophisticated. They understand that things can happen in a business, things can go wrong. What they don't want to be doing is going back to their own investment committees and explaining a loss. And we're very, very focused on that.
- [24:39]
A
And I get that you just mentioned data centers and obviously it's impossible to have an infrastructure discussion nowadays without touching on data centers. But one of the things I did want in particular to also hear you on is if you ever felt just because of the size of the opportunity, also the growing trend towards mega campuses, you name it. If you feel that, you've obviously just mentioned how difficult it was to get to where you wanted. But the scale element, is that an impediment for a mid market player like you?
- [25:11]
B
How do you see that from a hypercontext? Probably yes. The hyperscalers would be hard to fit into the portfolio. But there are other opportunities in discrete locations, great geographies that work very well. I mean, I would say in some respects we're in a very nice place with the data center world because, you know, we're supplying energy to them. You know, we've got a great example in the UK where one of our energy from waste plants was adjacent to I think about 100 acres of derelict brownfield site. That's one of the reasons we built our energy from wasteland there as well. That site's just been acquired by Microsoft and you know they're going to build a data center there. They're buying, I believe 80% of the carbon credits globally are being acquired by Microsoft. But guess where they're going to buy the power? They're going to buy it from us through a private wire. So that side of. And they're going to buy carbon credits from a due course as well. That element of adjacency is really exciting and super valuable for our investors without taking the risk of either construction or being a supplier to Microsoft, because that's going to be a tough negotiation, isn't it?
- [26:20]
A
Okay, well I think that's a great place to end this on. Niall, thanks very much for your time and for coming on the show.
- [26:26]
B
Thank you. Pleasure. Bruno, great to see you.
- [26:32]
A
That again was Nyle Mills, global head of Igneo Infrastructure Partners. To hear more of our episodes, head over to infrastructureinvestor.com podcast or you can search and subscribe to the Infrastructure Investor podcast wherever you like to listen.