Infrastructure Investment: Legal Constraints and Issues

Infrastructure investment:legal constraints and issues

Clifford Sims and Edward Johnson24 June 2014

2squirepattonboggs.com 2squirepattonboggs.com

Introduction: some fundamental issues

Investment powers for public and private sector schemes

Structural legal issues and the choice of vehicle

Lessons from Henderson PFI Secondary Fund II

Overview


Fiduciary duties and ESG factors

Pension funds as lenders/investors: counterparty risk and credit security

Limited liability?

Termination rights

Management control

Fundamental legal issues


Public (LGPS) schemes

Investment Regulations 2009

Statement of Investment Principles

Procurement

Knowledge and understanding: Public Service Pensions Act 2013

Private sector schemes

Trust deed and rules

Statement of Investment Principles

Knowledge and understanding: Pensions Act 2004

Investment powers/framework


Vehicle Liquidity? Transparency

Collective Investment Scheme• Unit Trust• Investment Company• Authorised Contractual Scheme• Limited Partnerships

x ?

Insured Fund x ?

Direct IMA x √

Real Estate Investment Trusts √ √

Direct Equity in InfrastructureCompanies

√ √

Structural issues: characteristics of alternativevehicles


PPP Primary Investment Structure

PROJECT CO

Government Body

HOLDCo

PROJECTAGREEMENT

Construction,Operation & Maintenance

SUPPLY CHAIN

Infrastructure Fund Sponsor/Investor

SeniorFunder

JOINT VENTURE

SENIOR DEBTCREDIT

AGREEMENT

MEZZANINECREDIT AGREEMENT

MezzanineFunder

Pension Fund

LOAN NOTES


PPP Secondary Investment Structure

Pension Fund

Joint Venture

SHARE SALEAGREEMENT

PROJECT 1 PROJECT 1PROJECT 1 PROJECT 1

LOAN NOTES & DIVIDEND RIGHTS

Government Body

Infrastructure Funder& Investor


PPP – Govt. backed long-term guaranteedrevenue?

Govt. Body

Loan Note Coupon& Dividend

Pension Fund

Rent/Unitary Charge

PaysRent/Unitary Charge

Hold Co

Debt ServiceProject Co

Senior Lender

SENIOR DEBT LOCK-UP


Aggregator model

Investor


Nature depends on when and how you invest

Exercisable indirectly or via derivative actions

Price of exercising rights against third parties?

Structural issues: Investor rights


Background

Limited Partnership Act 1907 inflexibilities:

“Management” is very wide

Removal of GP no help

PPM not binding

No misrepresentation claim

No negligence claim

Construction of documents key

No breach of investment restrictions or objectives

Lessons from Henderson PFI Secondary Fund II(1)


Establish contractual rights as early as possible

side letters

Most Favoured Nation clauses

Understand/agree investment objectives and restrictions before investing

Due Diligence on proposed/actual portfolio: investment consultancy

Indemnities – from GP/Manager?

Understand underlying insolvency risk of investee entities

Is Limited Partnership still the right model?

Lessons from Henderson (2)


Time to create new vehicle

Resources, personnel, deal flow, expenses

Investor-friendly terms, but still LP

Lessons from the Pension Infrastructure Platform


Clifford Sims

Tel: 020 7655 1193

Email: [email protected]

Edward Johnson

Tel: 020 7655 1097

Email: [email protected]

Questions?


This information has been prepared as a general guide and does not constituteadvice on any specific matter. We recommend you seek professional advicebefore taking action. We accept no liability for any action taken or not taken as aresult of this information.

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