Secondary PPP and infrastructure asset sales – to date primarily a phenomenon of the UK and Australia – are growing into a global market fuelled by the rash of infrastructure funds that have started up in the past two years.

This year alone a number of bank-led groups have announced new funds – for example CIT's Canadian Infrastructure Fund or Santander Infrastructuras – to look at both greenfield developments and opportunities in markets where to date there has been little secondary activity.

The infrastructure fund boom is partly due to a global boom in private equity, and partly due to a reshuffling of assets among project sponsors, as they attempt to balance their portfolios, gain critical mass in a given country, or access a new market.

New fund development

New fund development is at both an international and domestic level. In Spain, both Banco Santander and Grupo Ahorro Corporacion are looking to increase their equity holdings in regional and municipal PPP projects. And in Germany, Dusseldorf-based Lindner Immobilien Asset Management has set up the ImmoSafe fund for assets such as schools, courts, town halls, and prisons.

Immosafe is an open-ended fund for institutional investors "that have become more risk averse, and do not want to make investments in real estate which depend on capital gains, so we decided to launch a cashflow driven fund," explains Dr Juergen Bader, Managing Director at Lindner Immobilien Asset Management.

"As an open-ended fund we would prefer to have majority stakes," Bader explains. "The project developers are looking for alternatives to investing their own equity, and see us as a strategic partner. Some project developers are extremely flexible about giving up their controlling stake once a project is completed. Others might prefer a structure where we start with a minority stake, and over a period of time, such as five years after completion, move to a majority position."

Given the fact that the German PPP market only gathered pace during 2004, there is a shortage of up-and-running projects suitable for secondary market transactions. Consequently, ImmoSafe has joined various bidding consortia on the next round of German PPP deals and is also looking at a non-PPP project, negotiating to buy a portfolio of eleven properties where the tenants are motor vehicle registration offices.

International funds

In terms of international fund development Macquarie has blazed the trail becoming a major investor around the world via Macquarie Global Infrastructure Fund and other vehicles.

ABN Amro Infrastructure has also been very active in Europe and Australia, and in August announced plans to set up an Australian infrastructure capital joint venture together with Babcock & Brown.

Another significant player currently expanding its global reach is Westpac. Two years ago Westpac acquired 51% of Australian infrastructure investment specialists Hastings Group, and this year bought out the remaining 49%.

And it was two funds that form part of the Hastings Group that featured in one of the most high-profile international secondary market transactions of 2005 – a deal with Hochtief AirPort involving stakes in airports in Athens, Dusseldorf, Hamburg and Sydney.

HTAC

The assets were placed into a specially created German KG fund – Hochtief AirPort Capital KgaA – (HTAC) in which two funds managed by Hastings Funds Management Ltd (Australia) together hold 50%, Caisse de Depot et Placement du Quebec (CDPQ) holds another 40% and KfW-IPEX Bank holds the remaining 10%. Hochtief retains control of the assets.

The equity partners paid Eu313 million for the investment in HTAC, and the sale confirmed Hochtief AirPort's portfolio at a total value of over Eu1 billion. The deal thus not only released equity to Hochtief, but also set a firm market value for the assets.

The deal is in line with Hochtief's strategy of releasing capital from airport assets once they have been successfully restructured and optimised. Hochtief will use the cash proceeds to reduce respective debt, and to further expand its infrastructure asset portfolio and services capabilities, both of which offer attractive returns.

The HTAC structure makes secondary market trading much easier. Instead of negotiating the outright sale of a stake to an interested party, the stakes are simply transferred into a fund. And a crucial element is that Hochtief will receive an annual payment for the management of the HTAC investment partnership: the present value of the management compensation is around Eu30 million.

Many of the funds buying into infrastructure are by no means passive. Hochtief notes that some investors – the Australia Infrastructure Fund (AIF) managed by Hastings for example – are considered to have an innovative approach to privately operated infrastructure projects, and will bring some added expertise to further expand the airport business.

Active fund management

"The strategy of AIF and the Hastings Group is to gain access to quality assets in the infrastructure sector," explains Mitchell King, Chief Operating Officer at AIF. "Our preference is to invest in OECD countries, though that is not an obligation. In our last financial year we acquired seven airport assets, all negotiated on an exclusive basis."

Late 2004 AIF acquired a 47% stake in Queensland Airports Ltd (QAL), the owner of Gold Coast Airport, for $54 million. This was funded with the help of a $61 million offer of shares to institutional investors by AIF. In February of this year, AIF acquired, via QAL, an effective 49% interest in Townsville and Mount Isa airports, for $24 million. Both are situated in Queensland. And in March the Hochtief deal brought with it stakes in airports situated in Athens, Dusseldorf, Hamburg, and Sydney.

"Our philosophy is to be long-term active managers of assets, and we do that through board representation, working closely with our partners, and leveraging our broad experience," says King.

King notes that, in addition to gaining access to the various airport assets in the Hochtief deal, the overall AIF portfolio will also be able to be further improved by developing AIF's relationship with a strong technical partner such as Hochtief. "By partnering with someone like Hochtief AirPort we will gain access to numerous airport opportunities," he says.

Asset sales

Chile is expected to be one of the biggest markets for secondary concession sales this year. The maturity of many Chilean concessions make them a worthwhile asset sale for sponsors looking to free up equity for expansion elsewhere. Furthermore changes to regulations may soon allow insurance companies to invest directly in PPP projects which will open up another significant source of equity.

"Most of the Chilean toll road projects pulled in prime international sponsors, but some of them were more attracted by the contracts for the construction phase than acting as long term concessionaires," says Rudy Hassam at ABN Amro in Santiago.

Earlier this year Impregilo – advised by ABN Amro – invited bids for the Costanera Norte in Chile: offers were made by Acciona, a joint bid from Autostrade and SIAS (part of the Gavio Group), Hochtief, and OHL Concesiones.

The best bid came from Autostrade, which offered $308.9 million for 100% of the shares in the company, which also has $250 million worth of outstanding bonds, and $18 million worth of subordinated debt. In late July Autostrade and SIAS began the process of exclusive due diligence, which was scheduled to last until the end of August. Assuming they are happy with this process, Autostrade will apply to the Chilean Ministry of Public Works for the concession to be transferred.

The assignment of the concession must also be approved by Ambac, which wrapped the Costanera Norte bonds, and also by the Interamerican Development Bank (IDB), which provided guarantees on a portion of the bonds. Neither are likely to have any objections, since problems at Impregilo mean that Autostrade is a much stronger company. The entire process is expected to complete by the end of this year.

"It is a natural trend that now projects are up and running, some of the sponsors want to sell stakes and recycle part of their equity," Hassam explains. Future secondary market deals are likely to involve the sale of minority stakes, rather than the entire company as is the case with Costanera Norte.

"In Chile the sponsors usually acquired 80% to 100% of the project," he says. "Today, with ongoing projects, they do not need to control the company with 80%, and may want to reduce their controlling stake to perhaps 51%, allowing them to recycle part of their equity to be used in other projects in Chile or in the region."

Need for equity

The sheer pace of growth in PPP projects around the world suggests that developers are going to need to recycle a lot of equity in the coming years.

In Germany alone there could be Eu4 billion to Eu6 billion worth of PPP projects coming each year over the next decade, including schools, prisons and toll roads. Even with relatively high levels of debt financing of 85% to 90%, that still leaves very heavy equity requirements for major German players such as Bilfinger Berger, Hochtief and Strabag.

Sponsors are going to need financial investors to come into the market, and all the signs are that they are actively encouraging start-up of institutional investment in PPP assets. There is even talk that a developer may put some money into the ImmoSafe fund, just to help get the market started.

The opportunities for secondary market buyers of PPP assets are going to be considerable in the coming years, as developers sell off stakes. However, as more and more new investors move into what is a highly specialised field, established investors are going to see plenty more competition, and the bidding up of asset prices.