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Interview with Christophe de Taurines - Sireo Re.IQ 04/06


Re.IQ: What makes infrastructure an attractive asset class for investors?

Christophe de Taurines: Unlike real estate or private equity which show strong correlation to the business cycle infrastructure is quite resilient to a downturn in the economy. It is more strongly correlated to GDP growth. Furthermore, as it is often not aggressively financed, interest rates movements do not give cause for concern. Therefore, infrastructure provides a good diversification of risk. Often cash flows are government backed and inflation-linked and are therefore not very volatile. And lastly, the scale of the investments allows investors to invest large sums of money.

Re.IQ: What kind of investors are seeking exposure to infrastructure?

Christophe de Taurines: The common denominator of investors interested in the sector is that they are looking for solid long term income coupled with some long term capital appreciation. Investments are particular suited for investors that have to match long term liabilities such as pension funds, but insurance companies have also shown appetite for infrastructure assets.

Re.IQ: How can investors get access to the infrastructure market?

Christophe de Taurines: Institutional money can participate in several ways. Apart from investing directly in infrastructure projects, they can invest in infrastructure funds. As investments are typically large, banks have established certain feeder funds to allow investors with smaller investment budgets to participate. These vehicles are accessing the sector through fund-of-funds structures. There are also quoted companies that own and operate infrastructure assets, and investors buy shares in the company. Lastly, it is possible to either buy a construction group or shares in construction companies with a very strong stake in the sector.

Re.IQ: Turning to the supply side, where is investment product likely to come from?

Christophe de Taurines: Governments are increasingly realising that investors are interested in infrastructure assets and that it constitutes a separate asset for them. Hence, they have begun to sell off economic infrastructure assets, mainly in the utility sectors and in the transport sector. In addition, there are investment opportunities in telecommunications, for example satellites are being auctioned off.

Re.IQ: What is the specific risk profile of an infrastructure investment?

Christophe de Taurines: In addition to the traditional risk aspects such as construction risk, financial risk, operating risk and so forth, the biggest challenge when investing in infrastructure is the political risk. Most of the economic risk aspects can be dealt with by obtaining insurance cover, but this is not possible for political risk. This occurs at various levels. First, there is the macro political risk or the country risk. Second, the execution of a transaction has to be looked at. If there is a change of government or the government’s position towards the project is modified, investors may be caught wrong footed. We have seen this in Italy. When the government changed, the sale of a motorway was stopped by the new government and some serious conditions were put on the sale. This created problems for the investor and the case has now been referred to the EU. Third, the owner-operator has to consider, if and under which circumstances, the government or an appointed regulator may step in, when this happens it may result in a change of the return profile.

Christophe de Taurines is founder and CEO of Capital and Marketing Group. Based in London C&M has opened several offices in major financial centres around the world. The group offers services to asset managers wanting to structure and raise infrastructure and other alternative investment funds.

Capital & Marketing newsletter

Facing up to the challenges
First the good news: Institutional investors' appetite for European real estate investment vehicles remains strong and is set to grow. Here comes the catch: They have become a lot more choosy, making fund raising a more challenging task.

As investors scrutinise investment proposals, they require long reflection periods before a fund can be closed. At the same time US investors are increasingly reluctant to invest outside the US due to weakened US-Dollar.

Fund managers are also witnessing a shift in the type of funds investors are requiring. While it has become harder to catch investors' imagination for larger opportunity funds and their implied capital multipliers, investor interest has grown for cash producing strategies. They are not only looking for sector-specific or geographically focussed real estate funds but also for balanced portfolios; all offering lower total returns than opportunity funds but much higher cash distributions. Investments in such vehicles allow investors to tailor their investment portfolio to meet their specific risk-/return criteria. Furthermore, real estate assets offer add sound value to their asset base which has been severely depleted in the last few years. In short, the sweetspot for investors is a predictable cash flow with an equity "kicker".

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Capital & Marketing raises largest closed end real estate fund in Europe

Capital & Marketing Group is pleased to announce the close of European Property Investors (EPI) L.P., a Pan-European value-added fund targeting middle market and other corporate disposals. Capital & Marketing Group acted as placement agent in Europe and the Middle East for IXIS AEW Europe, the manager of EPI.

Christophe de Taurines, Managing Director at Capital & Marketing, states: "€769 million of total equity for EPI makes it Europe's largest real estate fund raise in 2004". With €2.2 billion of funds raised in 2004, Capital & Marketing is Europe's leading placement agent.

In 2004, Capital & Marketing Group acted as placement agent for Lehman Brothers' European Mezzanine Partners fund, Colony Capital's pan-European opportunity Real Estate Fund - Colyzeo and IXIS AEW Europe's Logistis II fund.

Capital & Marketing Group is an independent alternative investments placement agent which provides asset managers capital-raising services targeting investors in Continental Europe, UK and the Middle East.