PEP targets $742m for second Australia secure assets fund

The GP launched the secure assets strategy in 2018 to pursue opportunities that generate infrastructure-like annuity income yet offer opportunities for PE-style operational improvement. A separate fund – with its own risk-return profile – was deemed necessary because these assets were typically picked off by managers with a lower cost of capital.

The fund closed in 2020 with a corpus of AUD 660m, including AUD 300m in committed co-investment that PEP could allocate to deals at its discretion. Co-investment opportunities were also offered to LPs on traditional terms. Fund II will not feature a committed co-investment pool, according to a source close to the situation. PEP declined to comment.

The debut investment from Fund I was a carve-out of Origin Energy’s smart electricity meter business. The approximately AUD 267m equity commitment was accompanied by AUD 500m in debt funding to support a nationwide meter rollout. Landis+Gyr also contributed AUD 75m in the form of cash and its own metering services subsidiary.

At the time of acquisition, Intellihub had 750,000 units, most of them on Australia’s east coast, and Origin was the primary customer. PEP expanded the business to 2m units with more than 30 counterparties across Australia and New Zealand. In addition to diversifying the revenue base, contract tenor was lengthened from 3-5 years to 10 years-plus.

At the end of last year, Brookfield Asset Management bought 50% of Intellihub at an enterprise valuation of AUD 3.2bn. PEP plans to spin out the remaining 50% into a single-asset continuation vehicle, which would represent an exit for Fund I, while offering LPs the chance to realise their positions or roll over and remain with the asset.

Single-asset continuation funds are proliferating in the US and Europe as private equity firms explore ways to extend the holding periods for companies where they see significant future upside. They are also beginning to take hold in Asia.

Part of the logic of the transaction is that Intellihub has now been de-risked to the point that it has transitioned to core infrastructure and no longer fits the profile of the secure assets fund. This movement along the risk spectrum from private equity to core-plus infrastructure to core infrastructure is an increasingly well-trodden path as well as a strong source of exits.

The definition of core-plus assets that fall in between private equity and infrastructure is being stretched – a function of super trends around demographics, energy transition, and technology, but also a product of low interest rates and ample liquidity.

Intellihub was one of two secure assets fund exits at the end of last year. The other saw Winconnect, a provider of utility services to multi-tenanted buildings, sold to Origin. At the same time, Origin’s master services agreement with Intellihub was amended and Origin and Winconnect agreed to sell their electricity embedded network meters to Intellihub.

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• Topics
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