Presentation by Carlo Michelini – F2i’s CIO and Senior Partner – at the 5th Forum “Banca & Impresa”, organised in Milan on April 9th by the 24 Ore Group.
If this Giant Must Walk: A Manifesto for a New Nigeria
Carlo Michelini - 5th Forum Banca & Impresa
1. 24 Ore Group
5th Forum "BANCA & IMPRESA"
A speech from Carlo Michelini, F2i's CIO
Milan, April 9th 2014
2. 2
Sovereign funds as long-time investors
On a background of increasingly complex, unstable and interconnected markets,
professional long-term investors, such as sovereign funds, are increasingly looking for
investments that can provide sustainable middle- and long-term returns
From a financial point of view, long-term investors require:
‒ a constant yield in time
‒ a good future capital appreciation of the investment
‒ an acceptable risk-revenue ratio
From an economic point of view, long-term investors require:
‒ protection from inflation rate variations (inflation-linked returns)
As for portfolios, long-term investors require:
‒ a decorrelation from the economic cycle and from stock exchange performances
‒ absolute returns
3. 3
Available investment tools as an "alternative" to equities and
bonds
Based on their requirements, long-term institutional investors – including insurances
and pension funds – are encouraged to diversify their assets from traditional asset
classes (bonds and equities), and therefore turn to so-called alternative investments
The major types of alternative investments are:
‒ Private equity → middle-term
‒ Infrastructures → middle/long-term
‒ Real estate → middle/long-term
‒ Debt funds → middle-term
Infrastructure investments allow for more stable returns and protection from
economic cycles.
4. 4
Infrastructures as asset class
Definition
• Infrastructure: any public work carried out
within a country ("infrastructure is what lies
between companies and markets, and
between consumers and essential services" )
• They are grouped into the following tiers:
‒ economic infrastructures: transports,
networks, communication
‒ social infrastructures: schools, hospitals,
prisons, stadiums
• Other key features: (i) contractual approach
(eg. licensing vs contract), (ii) form of financing
(corporate vs project finance), (iii) market
ripeness, (iv) development stage of the asset
(greenfield-brownfield)
Benefits
• Real asset with a long useful lifetime
• Protection against inflation through
inflation-indexed rates
• Anti-cycle sector
• Constant generation and foreseeable
cash-flow and dividends
• Creation of value through efficiency
increase, investment plans and focus
on business areas
• Barriers to foreign access and,
therefore, less competition
Infrastructures allow to supply primary services and public services (e.g. gas, electric
power, transports, etc.), which are delivered on a natural or contractual monopoly basis.
The profitability of such services is overall foreseeable in the long-term, as it is pre-
defined by specific sector regulations or by long-term contracts.
5. 5
Access to infrastructure investments
• Listed companies: Purchasing shares in already listed
companies involved in the infrastructure sector (e.g. in
Italy: Terna, Snam, Atlantia, etc.)
• Atlantia case study: rate at privatisation 7.04 €, rate to
date 12.2 €, average dividend yield 3.9, however
affected by volatility (price range € 9-27)
• Debt financing: Acquisition of debt shares of
infrastructure companies, such as simple bonds (e.g.
bonds, mini-bonds, or project-bonds), or structured bonds
(e.g. securisation).
• Infrastructure funds: Investing in listed or unlisted
infrastructure funds, with global or domestic investment
outreach.
• Direct investments: Direct acquisition of the equities of a
single infrastructure operator, usually through co-
investment transactions with infrastructure funds. Some big
Canadian pension funds have been pioneers in this area.
Institutional investors can choose among various investment types in infrastructures.
In particular:
Increasing in-house
skills
Need for an investment
team internal to the
institutional investor
6. 6
Financial return profile for infrastructure funds
Infrastructure funds have longer duration and investment period compared to traditional
private equity funds
The following diagram shows, for illustrative purposes only, a typical financing profile
of economic returns and disbursement for investors of an investment fund
Investment period: approx. 4 years
SalesDividends: approx. 3-5%
Duration of the fund: 10-15 years
Average investment lifetime: 7-10
years
Dividends
Sales
Investments
Target yield: approx. 3-5%
Target gross IRR: approx. 12-15%
7. 7
Growth of the funds 2004-2012
Development of infrastructure funds
Infrastructure funds experienced a strong development during the first years of the last
decade until 2007, when the current negative financial situation started
After that – with exception of the annus horribilis 2009 – infra-funds posted an ongoing
positive ability to attract institutional investors, confirming thus their anti-cycle feature
10
23
34
39
53
25
46
41
36
4
10
23
45
40
9
32
23 24
0
10
20
30
40
50
60
2004 2005 2006 2007 2008 2009 2010 2011 2012
N° di fondi Capitale raccolto ($ bl)No of funds Raised asset (bil $)
8. 8
Introduction to the Italian environment – The infrastructure gap
Italy suffers from an infrastructure gap with the other countries of the European Union:
- limited investment capacity caused by a high public debt
- authorisation process paralysis
Both in water and gas distribution, and in the waste collection and treatment sector and
highways, there are huge investment opportunities
Quality of infrastructures
Countries with a good
infrastructure system, considering
the national development level
Countries with a limited infrastructure
system, considering the national
development level
Source: The Boston Consulting Group
9. 9
Introduction to the Italian environment – Opportunities from the
public sector
Possible privatisations/sale of public shares
Transports Airports
Joint ventures with municipal undertakingsBy meeting the stability pact requirements,
in the upcoming years, the local Italian
bodies (municipalities, provinces, regions
or municipal undertakings) will be
increasingly:
- looking for partnerships with private
investors, or
- carrying out (partial or total)
privatisations
10. 2013 2014 2015+
Autostrade Aeroporti Distribuzione gas Reti elettrica Servizio idrico integrato Fibra WTE Torri TLCHighways Airports Gas distribution Power network Integrated water services WTEFibre TLC towers 10
Infrastructure investment opportunities in Italy
F2i estimates that there are significant investment opportunities for infrastructures in Italy
in the upcoming years (over 6 bil € in 2013-2015+)
Total 2013-2015: 6,417 bil €
796
2,669
2,952
Investment opportunities for F2i (in bil €)
11. An example of modern financing – The role of F2i
11
– Thanks to a fundraising of 1,852 mil €, F2i is the biggest fund operating in Italy and counts
among the biggest country infrastructure funds worldwide.
– F2i has recently achieved the first closing of a second fund, which gathered already 745 mil €
(final target: 1,200 mil €).
– Managing approximately 2.6 bil €, F2i ranks today among the top five infrastructure fund
managers in Europe.
– F2i was created as a private, yet institutional tool by high standing sponsors, who contributed
to the establishment of the its solid reputation:
o the government, through CDP
o major Italian banks (Unicredit, Intesa SanPaolo)
o an important international asset manager (Ardian, formerly Axa Private Equity)
o the networks of former banking foundations and private welfare funds
o life insurance companies and pension funds
F2i is now carrying out an important international fundraising campaign for its Second Fund, attracting
much interest from European, North American and Asian investors, including a few major sovereign funds
12. Investment areas of F2i's funds
Committed
(mil €)
Granted
(mil €)
%
F2i I 75% 85.1%
55% 14.8% (Fund II)
100% 40.0%
100% 100% 70.0%
44.3% (35.7% Fund I; 8.6% Fund II)
67.7%
53,8% 87.2%
85.0%
15.7%
100%
49.8%
26.3%
100% 60.0%
100% 10.3%
1,987 1.699 86%
* Including the participation in Software Design.
** Including Equiter (put & call 2014), SAB (put 2014) and Aviapartners equities
*** Part of a consortium controlling 59.3% of the company. Expected closing: Aprile 2014.
119 6 5%
F2i II
SIA ***
F2i Reti
Logiche
50 0 0%
F2i
Ambiente
TRM
99%
Infracis 31 31 100%
SAGAT ** (Turin) 115
100%
18 100%
SEA (Malpensa/
Linate /Bergamo)
532 100%
Saster Net 18
63 55%
92%
HFV
82%
52 51
F2i
Energie
Rinnovabili
Metroweb
Italia
Metroweb 201 201
F2i Aeroporti
F2i Sistema
Aeroportuale
Campano
GESAC * (Napoli) 81
Alerion
Clean Power
78 64
532
88
F2i Rete Idrica
Italiana
Mediterranea delle
Acque
235 184 78%
F2i
Reti Italia I
F2i
Reti Italia II
2i Rete Gas 468 468 100%
99.9%
GAS
WATER
AIRPORTS
TLC
RENEWABLES
TRANSPORTS
WASTE TO
ENERGY
INTANGIBLE
NETWORKS
13. Enel Rete Gas Enel Rete Gas + 2iGas
Enel Rete Gas + 2iGas +
G6 Rete Gas
Clients (mil)
RAB (mil €)
Operating income (mil €)
Managing EBITDA (mil €)
ERG*
2.23
1,565
386
231
Clients (mil)
RAB (mil €)
Operating income (mil €)
Managing EBITDA (mil €)
2.79
1,846
471
278
ERG + 2iGas*
+25%
+18%
+22%
+20%
Clients (mil)
RAB (mil €)
Operating income (mil €)
Managing EBITDA (mil €)
3.81
2,588
639
370
ERG + 2iGas + G6*
+71%
+65%
+66%
+60%
Creation of value from an independent player in gas distribution
*Management accounts
14. The largest urban optic fibre network in Europe
Milano
Genova
3,350 km civil infrastructures
9,300 km cables
over 400,000 km optic fibre network
The largest urban network in Europe
233 km civil infrastructures
390 km cables
22,800 km optic fibre network
Ongoing transactions
Acquired networks
Milan
Genoa
Bologna
Brescia
Padua
Mantova
F2i's optic fibre infrastructures
15. First level airport network
F2i's airport industry
Gesac (Neaples)
Sea
(Malpensa/Linate/Bergamo
airports)
Sagat (Turin/Bologna)
NAP
TOR
MXP
LIN
BER
Majority share
Qualified minority share
BOL
Minority share
– Total pass. in 2013 51 millions
– Traffic share 35%
16. F2i Group – Current participations
The current outreach of the First F2i Fund generated "aggregated" returns for around 2.1 bil € and 812
bil € EBITDA in 2012.
Aggregated
Returns
Margin
Employees
2012
*Fund II participations
In
development
17. 17
F2i was created as a private, yet institutional tool to aggregate existing
infrastructures into business industries in order to guarantee the participating
companies with:
– operational efficiency;
– a balanced financial management, avoiding that companies become poorer
through exaggerated debts and extraordinary high dividends;
– a focus on development, reinvesting a great part of the cash flows generated
by strengthening managed networks and assets.
F2i could also prove to be able to generate good returns to investors:
‒ cash-on-cash net yield 4.8%, 4.1%, and 4.4% in 2010, 2011 and 2013
respectively
‒ management fees (0.8-0.9%) – unchanged since 2010
‒ estimated creation of value (also from external banks): +21% on 31/12/2013
An example of modern financing – The role of F2i