Innovative platform deals enable investors across the private capital spectrum to broaden infrastructure opportunities

Issue

Private capital investors have traditionally pursued individual brownfield assets or portfolios of assets, but are now seeking access to higher risk, higher return greenfield opportunities and a more regular pipeline of deals.

CVC and Bridgepoint have recently acquired the Dutch Infrastructure Fund and New Jersey-based Energy Capital Partners respectively, while Ontario Teachers’ Pension Plan has also entered into a platform deal with Corio Generation, a portfolio company of Macquarie Asset Management’s Green Investment Group (GIG) to develop an initial 9GW of offshore wind projects. GIG was itself built from a platform acquisition, Macquarie Capital’s purchase of the UK Green Investment Bank in 2017.

Shift in approach driven by increasing competition for brownfield assets

The trend is driven by a number of factors, including investors’ ESG strategies; their need to develop sector-specific expertise, deploy capital and grow AUM quickly; and the returns on offer from platform deals compared to one-off brownfield infra purchases or investing as an LP in sustainability-focused funds. For example, intense competition for operational wind farms and solar parks has significantly increased the prices of these assets at auction and lowered internal rates of return (IRRs), driving investors to look for access to upstream opportunities. Although these deals entail more risk, they offer the potential of more favourable economics.

Solution

In a platform deal, a capital provider will invest in an operating infrastructure or energy business, such as an infrastructure developer, either via a full acquisition or minority stake. This gives them access to the skills and experience of its management group, investment committee and deal teams, who can provide a high-quality pipeline of both brownfield and greenfield investment opportunities. The developer will draw down additional capital from the investor for projects over a period (within certain agreed parameters), enabling it to put its expertise to work.

Flexible deal terms balance investors’ and developers’ interests

What’s different for an investor (compared to simply becoming an LP of the owner of a fund investing in the same platform) is that the parties’ interests are balanced through a range of contractual terms designed to give managers sufficient independence to pursue deals and the capital provider a degree of exclusivity and also control over where – and how much of – its money is spent.

These include rights of first refusal for the investor, after which the developer can take the project elsewhere, or “most favoured nation” clauses whereby the investor is offered opportunities on terms better than those extended elsewhere. Contracts will often contain “X number of strikes and you’re out” mechanisms that enable the partnership for future opportunities to be terminated if the investor consistently turns down opportunities.

One of the most intensely negotiated aspects of platform agreements is what proportion of the investor’s capital is deployed on cost overruns versus new project opportunities. The best management teams understand the economics of development projects and are able to price deals accurately, but in such a dynamic and innovative environment, overruns are inevitable.

Cost overruns are subject of intense negotiations between parties in the renewables space

The Ukraine war has put pressure on cross-border supply chains, technological advances are leading to the release of ever-larger and more efficient turbine blades, and the increasing volume of Net Zero policy (including instruments such as the U.S. Inflation Reduction Act) have boosted global demand – and the price – of steel, concrete, copper and more.

As countries try to electrify quickly (and at the same time), and renewable assets allow that (particularly the capital extensive offshore wind structures), there is an urgent need to ensure markets are designed to accommodate price shifts and grid connections in a way that minimises delays for investors and consumers alike.

Investors will want to ensure as much of their capital as possible is directed towards new opportunities, but also accept that a degree of delay and price inflation is inevitable the further upstream in the development cycle they go. Platform deals will therefore typically see a budget agreed with the investor from the outset which includes a percentage contingency for overruns plus additional sums per project. But sometimes additional money will still be required, which will need to be negotiated between the parties down the line.

As the infrastructure and energy markets grow to deliver the $6 trillion per annum needed to deliver Net Zero, we can expect the growth of platform deals to continue.