Founded in 2006, Paris-headquartered PPP fund Meridiam Infrastructure has witnessed both dizzying bank hyper-liquidity and its polar opposite. "Transactions were less robust with a lot of money around," says Chief Executive Thierry Deau. "So we have benefited in an environment of lower leverage, higher returns and less risk."

Meridiam has almost fully invested its original Eu600 million ($835 million) 25-year fund designed for investment purely within PPPs within the OECD. Geographically, the fund is primarily focused on investment opportunities within Europe and North America.

According to Deau, since 2007 greenfield PPP asset valuations have fallen, as discount rates have increased, by around 100bp to 200bp. This has helped Meridiam meet its targeted IRR of between 12% and 15% on greenfield projects.

Last year was a productive one for Meridiam. It closed North Tarrant and Miami Tunnel in the US, the A5 in Germany, R1 in Slovakia and won the Saint Quentin velodrome in France and the Reunion Tram-Train project.

Meridiam has shrugged off any association with its racier brethren, such as the now insolvent Babcock & Brown and the maligned Macquarie infra-fund model, by closely aligning its interests as manger with institutional investors'. Meridiam differentiates itself by using conservatively structured project finance and being a long term holder of asset; it will not engage in aggressive financial engineering such as the accreting swaps and unsecured mezzanine financing that were used to bid up asset prices.

Importantly for long-term investors, Meridiam is a long term holder of assets and cannot raise debt at fund level. This approach, together with a reasonable pricing structure has meant Meridiam has shrugged off the pallid investor appetite encountered by some funds and is on schedule to raise commitments for two new funds – a Eu1 billion European fund and a $1 billion North America fund.

All of Meridiam's investors in its first fund have committed to the new funds, including cornerstone investors Credit Agricole, engineering firm AECOM and EIB. "Post-Babcock has been very good for us," says Deau. "The market is radically different; investors are more careful and appreciate our long-term business model. We don't churn assets and we don't put exit value or refinancing gains into returns."

Meridiam has no direct rival looking at the pan-European and North America PPP markets. The UK's Henderson-owned Laing and the Dutch fund DIF probably come closest as long term investors operating in the same areas. However, Laing was purchased at the top of the cycle and has been far less expansive post 2008, and is most visible in Canada in the primary market. DIF has so far made very few greenfield investments, concentrating instead on secondary purchases.

Meridiam has never pushed for leverage, and although the cost of capital for an individual project is generally lowered by the use of more debt, this is often an issue of government affordability. Meridiam would much rather have a greater equity stake earning a high return, than smaller amounts of highly levered more risky stakes. For greenfield availability projects the market leverage is around 85/15–90/10 and with demand risk around 70/10, says Deau. While Meridiam is happy to accept demand risk, the transaction must be structured to mitigate downside risk in the form of a minimum government guarantee, traffic support or subsidy. "We mitigate the risk that the project will completely fail. In exchange for that we are willing for the government to share profits. We are trying to keep our return probability within a reasonable band."

Meridiam's fee structure is typically based on a tapering investment fee starting at 1.2% of equity committed falling to 0.9% at year 5 and then falling to 0.5% at year 12 until the fund closes at year 25. Some of the larger investors receive a rebate on carried interest down to 14%. The investors do not share the risk free rate of return with Meridiam; it is theirs alone. The cost of carry works out around 14-15%. This compares favourably with the standard private equity model of 2% investment fee and 20% share of the upside.

While Merdiam has, to date, invested principally in greenfield projects, its next two funds will also look at off-market secondary opportunities.

As a predominately greenfield investor participating in bidding competitions, managing bids costs is critical to ensure fund returns are not eroded. "Screening is very important," says Deau. "It is important that we participate in projects only where there is strong political will." The US PPP market has a notorious stop-start nature, but the canny hire of Jane Garvey as North American Chair helps Meridiam side-step projects without political impetus. Garvey was a member of the transition team for President Barack Obama with a focus on transportation policies.

Parts of Eastern Europe can also exhibit wavering political support for projects. The A1 PPP toll project in Poland, which is lead sponsored by Cintra and co-sponsored by Meridiam, has been shelved for now in favour of direct procurement.
Deau sees most of the upcoming opportunities in Europe – France, Germany, Portugal, Netherlands, Belgium and Spain. "There is a huge backlog of infrastructure projects in Europe that are now only beginning to get done. If I were to pick three with the greatest opportunities I would say France, Germany and Portugal." Deau says he is particularly interested in the high speed rail opportunities in France and Portugal.

In terms of financing, Meridiam does not accept open ended refinancing risk. Perhaps surprisingly, almost all of the PPP deals banked in 2009 in Western Europe were done as long term deals without hard refinancing risk; while soft-miniperms may restrict returns with sweeps they do not threaten the project.

Meridiam was able to take advantage of the very long dated debt from TIFIA for its US deals and the EIB helped long-dated liquidity on its A2 project. EIB was a cornerstone investor in Meridiam's first fund and will participate again in its new European fund. "We don't have a special relationship with the EIB – their debt and investment side are separate. EIB as a multilateral lender will back anyone that invests in European infrastructure for the right project, but it helps if you're in for the long term," adds Deau.

Looking ahead, Deau does not see bank debt margins falling much further. In the US bonds will continue to play a significant role, particularly Private Activity Bond (PABs) due to their tax exempt status, but institutional investors in Europe are less motivated to carry out due diligence on a project-by-project basis without the comfort of monolines. However, Deau believes that two or three structured pools of finance may emerge whereby a pension fund backed manager can allocate debt to projects, carry out due diligence and effectively replace the monolines.