Infrastructure assets have largely traded through competitive bid processes. While every process is a little different – they do run to a pretty standard playbook. This playbook is developed and managed by the financial advisers that chaperone sellers and bidders through the process (it is basically a 4 week residential auction marketing campaign on steroids – and that is not to say that investment bankers are jumped up real estate agents 😊).
The typical sales process has a 10-12 week timetable. Bidders are given access to a data room of curated information on the project. It usually runs in two phases, with an initial large number of potentially bidders whittled down to a short-listed group of 3-4 bidders for a final binding bid round. Out of this a winner emerges.
The conventional way of thinking about this is that the winning bidder is that party who is best placed to maximise the value of the asset. That is, they might have unique insights into revenue enhancement or cost reduction opportunities. Or equally they might have synergies with other assets they own.
However, the reality is often much less about the asset. This is a competitive process where everybody had access to a common information set. The key difference is the winner bid more than everyone else.
Why did they bid more? Usually two reasons:
• Lower cost of capital; and/or
• Higher revenue growth/cash flow forecasts
These issues are particularly important for renewable projects. Most projects have offtake agreements for the initial years (most expire in 2030). As a result, bidders generally will have very similar assessments of revenues in the early years of operation for a project. However, post the end of PPAs, it is not uncommon for different bidders to have very different revenue forecasts.
Thus, winning bidders will, in most cases, be those parties with the most aggressive combination of lower return requirement (when did you last hear an infrastructure manager crow to their clients about how low their return targets were?) or have the most optimistic revenue forecasts (also not too attractive a characteristic). Importantly, the biggest divergences in revenue forecasts are often decades down the road – and so it might take a while before these forecasts are proven right or wrong.
It is this dynamic that underpins our view that investors should spend more effort on assessing the fundamental cost of the projects they are buying (as entry cost will be a fundamental driver of long-term return outcomes) as well as on benchmarking projects under standardised revenue assumptions.
But hey – that’s just us, we are fundamentally value investors – and the great thing about a market is that it takes sellers and buyers to make it work, and we all get to choose our own adventure!
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