Infrastructure Investment: Legal Constraints and Issues

Économie & finance Business

Infrastructure investment:
legal constraints and issues
Clifford Sims and Edward Johnson
24 June 2014

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 Introduction: some fundamental issues
 Investment powers for public and private sector schemes
 Structural legal issues and the choice of vehicle
 Lessons from Henderson PFI Secondary Fund II
Overview

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 Fiduciary duties and ESG factors
 Pension funds as lenders/investors: counterparty risk and credit security
 Limited liability?
 Termination rights
 Management control
Fundamental legal issues

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Public (LGPS) schemes
 Investment Regulations 2009
 Statement of Investment Principles
 Procurement
 Knowledge and understanding: Public Service Pensions Act 2013
Private sector schemes
 Trust deed and rules
 Statement of Investment Principles
 Knowledge and understanding: Pensions Act 2004
Investment powers/framework

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Vehicle Liquidity? Transparency
Collective Investment Scheme
• Unit Trust
• Investment Company
• Authorised Contractual Scheme
• Limited Partnerships
x ?
Insured Fund x ?
Direct IMA x √
Real Estate Investment Trusts √ √
Direct Equity in Infrastructure
Companies
√ √
Structural issues: characteristics of alternative
vehicles

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PPP Primary Investment Structure
PROJECT CO
Government Body
HOLDCo
PROJECT
AGREEMENT
Construction,
Operation & Maintenance
SUPPLY CHAIN
Infrastructure Fund Sponsor/Investor
Senior
Funder
JOINT VENTURE
SENIOR DEBT
CREDIT
AGREEMENT
MEZZANINE
CREDIT AGREEMENT
Mezzanine
Funder
Pension Fund
LOAN NOTES

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PPP Secondary Investment Structure
Pension Fund
Joint Venture
SHARE SALE
AGREEMENT
PROJECT 1 PROJECT 1PROJECT 1 PROJECT 1
LOAN NOTES & DIVIDEND RIGHTS
Government Body
Infrastructure Funder
& Investor

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PPP – Govt. backed long-term guaranteed
revenue?
Govt. Body
Loan Note Coupon
& Dividend
Pension Fund
Rent/Unitary Charge
Pays
Rent/Unitary Charge
Hold Co
Debt ServiceProject Co
Senior Lender
SENIOR DEBT LOCK-UP

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Aggregator model
Investor

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 Nature depends on when and how you invest
 Exercisable indirectly or via derivative actions
 Price of exercising rights against third parties?
Structural issues: Investor rights

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 Background
 Limited Partnership Act 1907 inflexibilities:
 “Management” is very wide
 Removal of GP no help
 PPM not binding
 No misrepresentation claim
 No negligence claim
 Construction of documents key
 No breach of investment restrictions or objectives
Lessons from Henderson PFI Secondary Fund II
(1)

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 Establish contractual rights as early as possible
 side letters
 Most Favoured Nation clauses
 Understand/agree investment objectives and restrictions before investing
 Due Diligence on proposed/actual portfolio: investment consultancy
 Indemnities – from GP/Manager?
 Understand underlying insolvency risk of investee entities
 Is Limited Partnership still the right model?
Lessons from Henderson (2)

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 Time to create new vehicle
 Resources, personnel, deal flow, expenses
 Investor-friendly terms, but still LP
Lessons from the Pension Infrastructure Platform

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Clifford Sims
Tel: 020 7655 1193
Email: clifford.sims@squirepb.com
Edward Johnson
Tel: 020 7655 1097
Email: edward.johnson@squirepb.com
Questions?

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This information has been prepared as a general guide and does not constitute
advice on any specific matter. We recommend you seek professional advice
before taking action. We accept no liability for any action taken or not taken as a
result of this information.
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