Adding value through active management and capital reinvestment

By Max Fieguth, Executive Director, Asset Management

Creating value in unlisted infrastructure investments requires more than an ‘invest and forget’ approach. Seeking to maximize returns of these types of assets requires active management, long-term thinking and often ongoing capital reinvestment.

A key component of our active management approach is enhancing value by reinvesting capital in our portfolio companies. There are several ways we do this, including follow-on equity offerings, bolt-on M&A transactions, and capital expenditure (capex) projects to support existing customer demand. By taking an active, value-accretive, and long-term course of action, we work closely with our management teams to support the execution of key strategic initiatives.

Investing in assets which are already in a portfolio has several advantages relative to acquiring new assets in the market:

• No competition. These are captive projects that we already control, thus no premium price for entry.
• Greater understanding of the asset. Already owning the assets means we have clear knowledge of their potential and limitations, including the operational requirements, regulatory constraints and opportunities.
• Existing customer base. We have a strong understanding of our customers and the underlying demand for our assets, which gives us a high degree of conviction in the business plan.
• Established relationships. An existing asset has established links, not just with its market but also with its supply chains, from materials to services and the workforce. Existing relationships with third party finance may allow lower costs of borrowing.

These factors combine to significantly reduce investment risk while creating an attractive risk/return profile, as capital reinvestment in an existing portfolio asset eliminates many of the risks associated with investing in a greenfield construction project.

IFM is distinctly positioned to take advantage of these embedded opportunities because of the depth of our bench—nearly 140 internal infrastructure specialists and 25 senior advisers with wide industry experience including engineering, consulting, operations and finance—and the maturity of our portfolio. With 41 portfolio companies and 186 underlying assets across IFM’s infrastructure funds, there are many opportunities for using cashflows to reinvest and build even greater value.

The recurring core level of reinvestment required across the portfolio—typically referred to as repex or maintenance capex—offers two opportunities to create significant value. The first is to leverage that basic maintenance capex to enhance the top line (see the Indiana Toll Road case study on the right for more on this). The second is to go beyond that minimum capital investment when there is an opportunity to generate further value by enhancing the income generating capacity and the capital value of an asset.

In fact, over the next five years, we will execute over $17 billion of capex projects across the portfolio, covering both growth projects and major maintenance expenditures.¹

The 157-mile Indiana Toll Road exemplifies IFM Investors’ active management and capital investment approach. IFM invested in ITR Concession Company (ITRCC), the operator of the Indiana Toll Road, in 2015.

In the first three years following our acquisition, ˜US$300 million was invested in road improvements and travel plazas to enhance safety and customer experience. This proactive management strengthened our relationship with the state government and key stakeholders, including road-users and the Indiana Finance Authority (IFA), our government partner.

In 2018, ITRCC shareholders agreed to pay the IFA US$1 billion over two years and committed an additional US$50 million to further improve road safety and amenities for heavy vehicle customers. In return, ITRCC was granted a one-time increase in heavy vehicle tolls.

The investments for roadway improvements as well as payments to the IFA, which were used for additional infrastructure improvements in Indiana, provided value generation for all stakeholders including customers, our government partners, and ITRCC shareholders.

Other elements of our active management approach have been a series of successful refinancings that de-risked the company’s debt. We have also worked closely with ITRCC’s board and management teams on social and sustainability initiatives, particularly in relation to worker and customer safety, workforce diversity and emissions reductions.

ITRCC’s revenues have increased over time, demonstrating resilience through several economic cycles. This, combined with IFM’s successful active asset management outcomes, makes the investment an example of how well-managed core infrastructure can play a significant role in investor portfolios.

IFM’s relationship with communities and wider stakeholders is epitomised by our holding in Manchester Airport Group, where we have a 35.5% stake (with 50% governance rights), alongside Manchester City Council, which owns a similar 35.5% stake, and nine other Greater Manchester local authorities whose combined holdings make up the remaining 29%.

The group is one of the UK’s largest airport operators, managing Manchester, Stansted, and East Midlands Airports, while continuing to find opportunities for further expansion. Since IFM first invested in early 2013, there has been significant capital investment in the asset, including the £1.3 billion Manchester Airport Transformation Program backed by all shareholders. This project was funded with a modest injection of fresh capital from IFM and other shareholders, but the bulk of the investment came from reinvesting cash flows, rather than taking them as distributions.

The improved efficiency created by investment has translated directly into improved financial performance for investors while providing benefits to other stakeholders, including airlines, who can grow their operations and make them more efficient. Other benefits include smoother journeys for travellers, a better customer experience and expanded route networks, as well as a positive financial impact for local communities through jobs and economic growth.

The rationale was straightforward. Manchester Airport had runway capacity for 55 million passengers per annum, but its terminals could only manage 28 million. An expansion of the terminal facilities was the logical reinvestment opportunity, which creates value by making the most of existing runway capacity, improving operational efficiency, and augmenting the customer experience.

The transformation programme, which began in 2017 and will continue until 2025, will double the capacity of Manchester Terminal 2 and grow total passenger capacity by 50% to 42 million per year. The asset is now working far closer to its real revenue-generating capacity, thanks to capital reinvestment.

Meanwhile, a carbon reduction program means all three airports are now carbon neutral, with all energy needs met via renewable sources and offset programmes. Supported by IFM, the group has also made substantial investments in the Stansted Airport College, which trains airport industry workers of the future. This initiative builds public trust and contributes to economic prosperity for individuals, communities and the wider air travel industry.

For more on the differences between open and closed-ended funds see our white paper: Open and closed-ended funds in infrastructure investment portfolios.

An open-ended fund structure is essential for long-term active management, allowing continuous investment and divestment without fixed deadlines, and enabling managers to focus on sustainable growth and value creation. Closed- and fixed-term funds have deadlines for returns, often prompting short-term strategies that may not maximize returns and, in the worst cases, can undermine long-term value.

Indeed, inadequate investment can lead to depreciation as insufficient maintenance can create the need for major refurbishment that can interrupt operations, undermine earnings, and create reputational risks during disruptive works.

Capital reinvestment in existing assets is greatly supported by the existing relationships between a company and its wider stakeholders, enabling better monitoring of supply chains and better relationships with employees, customers and communities. These relationships are part of long-term financial value and an important aspect of our credentials as custodians of essential infrastructure which seeks to maximize long-term value to our clients and their beneficiaries.

Active management of assets and the judicious reinvestment of cashflows in capital development has long been the approach adopted by IFM Investors. That does not necessarily mean holding assets into perpetuity. Value creation through reinvestment can often enable us to sell assets at a significant premium, and when greater returns are available through sale to another investor or corporate owner that is the path we take.

But achieving such premiums starts with reinvestment. When we already own an asset with potential, one that can be grown and advanced through active strategies and capital reinvestment, that is an opportunity we seize.

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IFM Investors is a private markets manager with a focus on infrastructure and capabilities in unlisted and listed equity, private equity and debt. We’re based on four continents, with a global network that helps us uncover opportunities.

IFM was founded by pension funds. It’s still owned by pension funds today. Our clients are stewards of capital too, with the same duty to deliver value over decades. We share a multi-generational vision: to invest, protect and grow the savings of millions of people. We do it by investing, owning and financing the assets our clients and their beneficiaries rely on to live their lives.

_{¹This figure is equity-weighted.}

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