Deal focus: Anchorage exits rail player, launches Fund IV

When private equity firms describe how they streamline operations and improve the sustainability credentials of portfolio companies, this does not usually include bringing steel-heavy industrial manufacturing operations in-house. Anchorage Capital Partners’ investment in Australian rolling stock leasing company Rail First Asset Management is the exception.

Institutional slavery is a large concern in the rail space, with some of the main wagon manufacturing jurisdictions considered hotspots of forced labour. Relocating this aspect of Rail First’s operations to Australia effectively eliminated that environmental, social, and governance (ESG) risk and helped set up a AUD 425m exit last week to Dutch GP DIF Capital Partners and Amber Infrastructure of the UK.

“We wanted to ensure that everything was in our control,” said Beau Dixon, a partner at Anchorage and chairman of Rail First. “For us, a really powerful message to all our stakeholders was that we could deliver a product built in Australia under our control and using our labour for the same cost as an imported one.”

First Rail is the first exit from Anchorage’s third fund, which closed on AUD 360m in 2017, although there were at least four exits from other vehicles in 2021 alone. Overall, the firm has delivered a gross multiple of 4x and a weighted average net IRR of 50% across 14 realised investments.

The transaction coincides with the launch of Fund IV, which is targeting AUD 500m. It will invest in Australasian companies with enterprise valuations between AUD 100m and AUD 350m.

“Fund IV will focus on operational improvement and special situation investments, utilising Anchorage’s institutionalised investment processes and proprietary operational improvement framework, developed and refined in prior funds,” said Phil Cave, Anchorage’s executive chairman and founder.

“We target control investments of businesses of scale that have a clear pathway to customer and are performing below their potential.”

Anchorage acquired Rail First in early 2019 as a non-core asset of its US parent, Sasser Family Holdings, for AUD 250m. The turnaround investor noted at the time that the company had a dominant market position but had been impacted by drought and a slowdown in the mining sector.

The business – then known as CF Asia Pacific – was characterised by a preference for short-term contracts, which were seen as more lucrative, and a focus on servicing the coal industry. Some locomotives and wagons had been sitting idle for years. A strong footprint in terms of capacity to provide maintenance services was underused.

About 20% of the fleet, including wagons that were only suitable for bulk commodities, was scrapped as part of a pivot toward the intermodal segment. In the rail space, this denotes standardised, interchangeable freight containers that are more appropriate for consumer staples. Coal was completely exited. About 85% of the business is now intermodal.

Contract earnings doubled during the holding period, all of which were channelled back into the company rather than distributed as dividends. Meanwhile, the average tenor of contracts tripled, which was seen as a validation of the view that customers – including Aurizon, Pacific National, and Qube Logistics – valued the stability that comes with longer-term access to higher quality assets.

Workshops providing maintenance services were given cloud-based upgrades across operations, from leasing management to asset registry and financial reporting. “We spent a lot of time on ensuring that we were delivering systems that were fit-for-purpose, not just the latest thing off the rack,” Dixon said. “Systems have to be user-friendly and easily accessible.”

New management was put in, including a CEO and COO with experience at the likes of Aurizon, Pacific National, and Canadian Pacific. Automation was introduced, but the higher cost of in-country manufacturing was largely mitigated through workforce management schemes as simple as optimising worker scheduling. More than USD 100m was invested in new locomotive models.

Other ESG initiatives included introducing hydrogen and electric locomotives – this is yet to come to fruition – and upgrading a large portion of the fleet for more efficient use of conventional fuels.

The biggest opportunity to claim an ESG win, however, was in an overall logistics industry shift from road to rail. In addition to suffering fewer user accidents, rail freight is considered 4x more fuel efficient than road freight, producing 16x less carbon pollution per tonne-kilometre.

“We saw that as an opportunity where we could deliver a higher quality and more available fleet,” Dixon said. “It was one of the key foundations of our investment and a big driver from an ESG standpoint.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Infrastructure
• Industrials
• Trade sale
• Fundraising
• Buyout
• Australia
• Anchorage Capital Partners
• Logistics
• Transportation
• ESG