The following is a transcript of a speech by Corrado Santini – F2i Senior Partner specialised in renewable energy, water services and waste-to-energy sectors – from the meeting entitled “Utilities: is the little prince still a prince?” held in Rome on October 14th 2014.
Speaker: Corrado Santini, Senior Partner of F2i Fund, which has been contributing for years to consolidating public local services by investing 750 million Euros from 2009 to date in various sectors [gas, water services, waste-to-energy, ed.]. What kind of scenario do you expect in the future, particularly considering the upcoming regulations?
Corrado Santini: We can picture a scenario based on our five-year experience.
As you mentioned, we invested close to 800 million Euros in gas distribution, water services and waste disposal. We carried out five transactions – two were not finalised, two are ongoing – with multi-utilities, North Italian municipalities as well as southern municipalities and regions. We gained experience. We learned three lessons, which we believe should be taken into consideration also by those who wish to invest assets. I’ll just mention three brief tips and pointers.
The first: when approaching a transaction, local consent is needed, meaning consent from local political entities, not only to acknowledge the “soft” interdicting power of local bodies, which is legitimate up to a certain extent, but also to gain those entities’ support during the investment process. Independently from organisation charts and share capital distribution, local bodies are very strong stakeholders of public local services.
In order to achieve consent, a strong hand is also needed. To this extent, the role of central authorities ─ who should act as substitute powers ─ becomes crucial. In case local bodies with decision power are unable to make decisions, it is necessary that regional and national authorities (less subject to influences compared to regional entities) should be ready to take control, or, as it often happens in Italy, only prospect to take over – which is sometimes already enough. Therefore, our first key element: local consent achieved essentially through dialogue. I personally talked to water referendum movements and with CGIL on the water instance. They addressed me as if I were Matteo, i.e., they perceived me as if I were from Goldman Sachs: F2i may be similar to Goldman Sachs, but not exactly. Dialogue is a necessary step.
Second key element: when entering due diligence agreements, an entity often faces counterparts who are not used to due diligence. Patience is therefore necessary, as very often data rooms are filled in and sometimes not even consistent – because of a lack of objective structuring, not because of subjectivity or bad faith. Advisors are not suitable to due diligence agreements in these sectors, for which ex-managers with a practical expertise acquired on the field would be more suitable. These are not easy to select or are often unavailable. They may be former competitors of the target of the due diligence agreement, which may create conflicts. The advisors however lack the necessary knowledge of the business targeted for investments.
Third key element: upon entering the agreement, the governance issue is to be addressed, understanding how it is structured within the company – not so much the target company, but the partner company – as infrastructure funds usually don’t even acquire half of the share in Italy. In fact, they are relegated to the qualified minority. The partner organisational chart is not exhaustive. If we want to be polite, we can say there is a shadow cabinet that needs to be fully understood, to avoid building up defences on one side and ending up being attacked from the other.
In order to understand this, much patience is necessary and one should be prepared for such shadow cabinet to also change in time. This is a dynamic process involving some risks for those managing investments, who just like me, would then need to explain to their own board the reasons why the dynamics have changed.
In conclusion, local public sectors are highly strategically valuable for infrastructure funds, undoubtedly representing a significant reservoir which, just like oil reservoirs sometimes, currently requires highly complex drilling technologies. Based on our field experience, however, we are very optimistic.
Corrado Santini, Senior Partner of F2i – Fondi italiani per le infrastrutture SGR
Corrado Santini 