Infrastructure assets have grown rapidly over the last five years, with a massive increase in funds raised to invest in them globally. This has been due to a number of long-term structural trends, including governments’ desire to raise funds, the ageing of the existing infrastructure in developed economies and the requirement for new infrastructure in developing economies, pension funds’ need for a global asset class with a safe, dependable yield, and a desire by financial institutions to develop a new asset.
The current economic environment has increased infrastructure’s attraction as an asset class. With the virtual disappearance of real estate and fixed income from investment portfolios, they have been largely replaced by infrastructure. Governments are even more keen for cash as tax receipts have fallen and, with sharply falling return across most asset classes, infrastructure has stood out as the one class whose relative allocations have increased dramatically (many funds are in the process of increasing their absolute allocation). There is general acceptance that infrastructure asset deals will be the first to be completed once liquidity comes back to the market, given their more predictable, long-term cash flows.
Core infrastructure assets are defined as those assets with sustainable, long-term cash flows and include “regulated assets” (e.g. power, gas, water), “user-demand assets” (e.g. transport) and “social infrastructure assets” (e.g. hospitals, prisons). The players in the sector are changing, with less emphasis on publicly quoted infrastructure funds, and the addition of sovereign wealth funds, direct investors and, most recently, private equity.
What skills are needed now?
The majority of talent requirements to date have been for fund professionals and the portfolio companies. At the funding level, a unique blend of skills is needed – the drive of an investment banker, the close scrutiny of a principal investor, the marketing ability of a fund raiser, the diligence and caution of a project financer, the knowledge of an operator and the personality to deal with government. This is also a segment that demands a sense of social responsibility, given the position of an asset in its community.
From a portfolio company perspective, there is increasing recognition that the executive management team is critical to performance, even in the most protected of regulated industries, and that the type of manager’s profile changes with the economic environment. We see this as a major trend over the medium term, with a need to incentivize the “right” operational teams.
How can Egon Zehnder support the infrastructure industry?
The emergence of this asset class has been phased geographically, so that only a firm with a truly integrated, international network of offices can operate effectively. We have been instrumental in supporting funds expanding into new international regions and assisting new types of entrants, such as private equity, to build new infrastructure teams. The fact that our firm is focused on the whole economy gives us current experience in all the critical segments (government, investment banking, asset management, private equity, corporate, fund raising, etc.) to allow a balanced perspective.
Deal size in this asset class is large and successful bidding often includes a consortium approach. We are well connected to the global infrastructure funds and understand their differing approaches to acquisition and the running of their asset portfolio. The parallels to private equity portfolio evolution (operating partners, etc.) are clear, and our involvement in this sector since its inception allows us to contribute relevant knowledge.
Our infrastructure client base includes infrastructure funders, fund raisers, corporate executives, board directors and governments. Our range of services includes both executive search and appraisal. Executive search includes infrastructure needs in governments, funds, fund raisers and the portfolio companies. In the latter case, we operate both at the point of ownership and during the process of bidding for an asset, as a new management team often needs to be assembled rapidly by the bidder to help secure the asset. Our appraisal advice is centred on both the appraisal of executive management teams (individuals and teams), and the effectiveness of boards, which face unique challenges in infrastructure.
How we operate
Egon Zehnder’s Infrastructure Practice is global in reach, and consists of a dedicated group of consultants from each of the major geographical markets, all of whom are passionate about, and experienced in, this segment – it is one that has great impact on the communities in which we live.
Infrastructure is one of the most global and “connected” segments, from both an acquisition and an asset management perspective, and thus ideally aligned with our own unique geographical “one-firm” structure. We have been advising on talent in the infrastructure market since the market’s inception in Australia (1980s), and Canada and the UK (1990s). As the market develops geographically, we are applying our knowledge from existing infrastructure markets and other relevant segments. Our ability to build long- term relationships, fostered by our firm’s structure, allows us to provide continuity of advice.