11.1 Marguerite II’s eligible sectors

TABLE 11.1 Marguerite II’s eligible sectors

TRANSPORT

Policy drivers • Quality of infrastructure varies enormously across the EU. • Significant greenfield CAPEX is required to meet EU’s transport investment requirements (TEN-T). • Major expansion, upgrading, and maintenance requirements exist in all subsectors.

ENERGY AND RENEWABLES

• Large greenfield CAPEX is required to meet EU objectives in renewables and energy efficiency. • Energy security concerns exist because of global volatility of energy supplies driving more investment. • New areas to be connected to existing European grids require significant upgrades.

TELECOMMUNICATIONS

• Demand for internet is high, and broadband usage is extensive. • Economic rate of return on broadband networks is high. • The European Commission announced targets for broadband and superfast broadband in

Europe. • Local authorities are supporting broadband projects through subsidies.

Investment drivers • Infrastructure PPP pipeline is fueled by persistent budget constraints in the EU. • Infrastructure investment is used as an economic stimulus tool. • Focus is on projects that are part of the TEN-T and that have a high deliverability ratio. • Sectors supported by EU policies for climate change, energy security, and waste management. • Significant onshore and offshore transmission networks and upgrades for balancing (increased renewables capacity). • Focus is on higher priority projects supported by European Investment

Bank funding (TEN-T or Projects of

Common Interest). • Financing is not sufficient for broadband networks in white/gray areas. • In many member states the ecosystem/framework to deploy broadband is not fully organized. • Need exists for a proactive equity approach from a fund like

Marguerite II with a greenfield track record.

Source: Marguerite management. Note: CAPEX = capital expenditure; EU = European Union; PPP = public-private partnership; TEN-T = Trans-European Transport Network. WATER

• Sector has strong political dimension. • Mature market exists with wide range of delivery models/organizations across

Europe. • Aging infrastructure needs upgrades (to mitigate leaks, and so on). • New markets include agriculture and industry.

• Driven by implementation of EU directive on wastewater treatment, especially in Central and Eastern

Europe, Italy, and Spain. • Sector is very suitable for PPP/ concession. Case Study—The Marguerite Fund: An Infrastructure Fund Sponsored by Development Banks  | 231

subject to a specific requirement not to invest in more than 50 percent of each project’s equity. This requirement was relaxed for Marguerite II, which is not subject to any formal limitations in terms of stakes acquired. Partners can include construction companies, utilities, independent power producers, project developers, and operators.

In terms of position limits, Marguerite II is subject to various requirements, but they are not overly stringent. Its minimum ticket size is €10 million, and its maximum ticket size is 20 percent of total capital commitments—any investment exceeding 10 percent of commitments must be approved by the Advisory Committee. In practice, Marguerite II targets €20 million to €100 million tickets, which, depending on sector, geography, and leverage, translate into project sizes of €50 million to €2 billion. From a sector standpoint, Marguerite II is not subject to minimum or maximum allocation thresholds. From a geography standpoint, no more than 20 percent of Marguerite II can be invested in a single EU member state and no more than 5 percent in preaccession member states (but this may be increased to 10 percent with Advisory Committee approval). The Advisory Committee (see the governance subsection) can waive some investment mandate restrictions (for example, for investments exceeding certain thresholds).

The investment process follows the standard path typical of infrastructure fund managers, culminating in an investment decision taken independently by the Investment Committee. In the origination phase, Marguerite sources deals from direct market contacts, industrial and financial partners, banks, and advisers. A preliminary investment proposal is then submitted to the Investment Committee, which gives the go-ahead and approves a budget for transaction expenses. External advisers are hired to assist through due diligence and deal structuring. A full investment proposal is then submitted to the Investment Committee, including analysis of the deal structure, risks, valuation, financing, and other contractual arrangements. Given its focus on greenfield projects, Marguerite is hands on when it comes to negotiating investment and shareholder agreements, as well as project documentation (such as construction, operations and maintenance, and financing contracts). The Investment Committee has sole responsibility for investment approval (see more in the governance subsection). After closing, Marguerite generally takes one or more board seats to exercise oversight of company strategy, performance, and reporting.

In compliance with the AIFMD, Marguerite Investment Management has a dedicated executive in charge of risk management. This person is not a member of the Investment Committee, to ensure the separation of functions. Marguerite Investment Management has a full set of detailed risk management procedures for various types of risks applicable to Marguerite II’s investments. Compliance with investment limits is verified by multiple levels of the management team during the due diligence and investment decision phases, and subsequently by both an asset management and risk management team.

PORTFOLIO AND TRACK RECORD

By September 2018, Marguerite I and II had closed 24 deals in 13 countries. The 20 deals closed by Marguerite I mostly followed the project finance model, with €9 billion of nonrecourse debt mobilized (roughly half from commercial banks and half from public sources), six investments refinanced, and five investments

exited via sale to Marguerite Pantheon. Marguerite II had a successful start in 2018, with four new deals closed by September 2018. For confidentiality reasons, Marguerite does not publicly disclose realized project and portfolio returns. See table 11.2 for Marguerite portfolio companies.

ADDITIONALITY AND MULTIPLIER CONSIDERATIONS

Despite its focus on commercial investment opportunities, Marguerite aims to deliver additionality and minimize the risk of private investors being crowded out. Specifically,

• Greenfield projects. Marguerite focuses on greenfield projects, in contrast to private sector infrastructure funds that focus on brownfield, yield-producing assets. Marguerite II pushes further into earlier-stage greenfield projects that require substantial involvement in the design and development phases. • Investment only to fill funding gap. Even when investing in brownfield assets,

Marguerite seeks to fill a funding gap left by private sector funds. For instance, it invested in a shadow toll road in Spain at a time when risk aversion in that country was high after the country was severely affected by the 2008 global financial crisis (capital is flowing again to Spain, at the time of this writing). • Demonstration effect. Sponsors are keen for Marguerite to be involved in innovative projects that can have a demonstration effect. Because of the risk associated with novel types of projects, private infrastructure investors tend to shy away from these deals in the first instance. For example, Marguerite was one of the first financial investors in greenfield offshore wind farms in

Europe, demonstrating the commercial feasibility of these projects, which are now targeted by private investors.5 Specifically, Marguerite invested in

C-Power (Belgium) in 2011 and Butendiek (Germany) in 2013. At the time, infrastructure funds and institutional investors had not yet invested in greenfield offshore wind farms. Two Danish pension funds coinvested in Butendiek primarily because of Marguerite’s role as anchor investor. • Investment in riskier geographies. Marguerite has also targeted Eastern European countries perceived by investors as higher risk. Marguerite will continue to do so in the future, with Marguerite II’s scope expanded to preaccession countries.

Marguerite I invested in Croatia, Latvia, Poland, and Romania—considered to be riskier investment environments than Western Europe. • Investment on a commercial basis. Marguerite does not undercut competing funds on pricing. It generally targets double-digit returns, which was ambitious in 2010 when the fund was set up and, according to Marguerite management, still reflects commercial standards for greenfield investment.

According to Marguerite management, 90 percent of investments comply with these criteria, and the remaining 10 percent are more conventional infrastructure investments. The conventional investments include, for instance, a solar photovoltaic project in France. According to Marguerite and the EIB’s assessment, the availability of private financing for greenfield, innovative projects remains limited in relatively riskier geographies and certain sectors. These geographic and sector limitations exist despite the current high availability of capital for brownfield infrastructure induced by the low interest rate environment.