A Graceful Exit
Keep the end in sight when it comes to infrastructure investments

Cyrille Vittecoq, vice-president, Investments, Energy Sector, Infrastructure and Energy Private Equity, Caisse de dépôt et placement du Québec

Infrastructure investments are becoming a hot new asset class drawing the attention of pension funds and institutional investors looking for strong and stable cash flow returns to compensate for reducing yields and a relative lack of availability of traditional fixed income securities. They enter the sector with a longer horizon in mind than that of other private investments. In some cases the horizon is so long that there is a perception that no particular exit strategy is required. On the other hand, while the amount of new money flowing into the sector is still rising dramatically, some earlier investments are already maturing and entering potential exit windows.

All investments have to come to an end some day because most of the return is generated at the end. Infrastructure investments, like other high-yielding securities, provide some return during the holding period, relieving the pressure to provide the total internal rate of return on exit. But unless your initial investment capital is amortized along the way in your cash receipts (as is the case for mortgages and depleting resource investments), you will need to plan for an exit – ideally even before you make the investment.

Publicly traded bonds have a maturity date, but can be sold before it, resulting in an extra profit or loss on the initial capital. The same is true for publicly traded equities, which have no maturity but can be sold at any given time, subject to market conditions and original target yields and prices. When planned exit conditions are met, all that is needed is a call to a broker.

For unlisted equities (including infrastructure investments) the targets and market monitoring are the same, only the execution is different. Investors can do this through public offerings, buyout by other private equity players, puts and calls arrangements and auctions. All these methods have their pros and cons. Initial public offerings (IPOs) are subject to size, timing and regulatory constraints. Options are subject to fair market value evaluations, and auctions are subject to due diligence and closing risk on the part of the buyer. However, at the end of the day the single most important factor behind a successful exit (assuming market conditions are there) is stakeholder alignment.

A successful exit
Shareholder alignment begins with shared investment objectives such as time horizon, expected return and perspectives on all the risks involved in a specific investment. We often find that misalignment and difficult exit processes originate from the first day of the investment. Along with stakeholder alignment, it is also very important to have management on board to ensure a successful process. That means proper compensation incentives and, ideally, a significant investment in the project or company. At the same time, it is important to be wary of expensive golden parachutes that may detract potential buyers and affect shareholder value.

Finally, time and effort should be devoted to exit preparedness as early as possible. To do this, it is important to have good record keeping (accounting and legal) and governance so that any process goes smoothly, whether it is a private auction or a public share offering. Ultimately, a successful exit requires good planning, hard work and sometimes luck.

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