Michael Ryan is a founder and CEO of Dalmore Capital, which since 2009 has raised more than £5 billion from institutional investors globally to back infrastructure investments in the UK, with a focus on essential public services. Dalmore has invested in schools, hospitals, roads, utilities, trains, waste treatment and renewable power generation, most notably as the joint largest shareholder in the Thames Tideway Tunnel project, which involves the construction of a new 25km long, 7km wide super-sewer under the River Thames in London.
The £4.3 billion Thames Tideway project is the first to be developed under the Water Industry (Specified Infrastructure Projects) Regulations and has a bespoke structure similar to a regulated utility, using a Regulated Asset Base model. “That worked for us because the government structured it in a way that suits low-risk investors,” says Ryan. “It is a very complex and challenging engineering project, which is currently about 50 per cent completed, but it is set up to limit investor exposure to construction overruns and to provide a yield during both the construction and operation periods. If it hadn’t been structured like that, it wouldn’t have worked for us.”
Dalmore has a large portfolio of PPP assets and a growing interest in regulated assets, such as the UK gas utility Cadent and water utility Anglian Water Group, as well as a portfolio of UK wind farms owned in partnership with EDF. Ryan says: “Our perspective has changed on regulated assets since the general election in December 2019. We delayed the launch of our next fund because of political uncertainty, but now we are looking at it and saying that on realistic assumptions we would consider buying more regulated assets. The perspective has shifted a bit.”
“When we enter into these transactions with regulated assets, we are looking at returns in the 8 per cent range, with volatility of +-2 per cent. It is the lack of volatility that is important to our investors – they are looking for an investment case that is not based on significant growth and doesn’t have too much market exposure or technology exposure,” he says.
Dalmore closed its second fund in 2014, raising £540 million to invest in operational PPP assets in the UK. That fund sourced 40 per cent of its capital from European investors, but the third, which reached final close in August 2018 at £950 million, took in less European money but a sizeable amount from Korean investors.
“Other than Korean investors, there has been very little interest in investing in low-risk UK infrastructure over the last three years,” says Ryan. “That was a result of Brexit and political uncertainty, so we are quite hopeful that will have changed as we embark on our next fundraising.”
He would like the government to identify a pipeline of future projects and work to attract international pension fund investors: “We would like them to start providing reassurance to overseas investors that the UK is a stable place to invest in infrastructure,” says Ryan. “Thames Tideway is a good example of how the government can create an environment to attract pension fund capital, but nothing happens quickly. We see that as something that will start impacting our market in two to three years’ time.”
He adds: “We are focused on assets that are defensive and avoiding assets that have a lot of GDP correlation, partly because we are cautious on the prospects for UK GDP growth as the country moves forward with Brexit. The defensive nature of the strategy is demonstrated by the resilience of the existing portfolio to the effects of COVID-19. Throughout the period affected by the pandemic, the private and public sectors and regulators have worked extremely well in partnership.”