Knowledge Center: Publication
Bolstering talent and leadership in infrastructure asset management11/2/2017 Marcus De Luca
The striking upsurge of private investment in infrastructure assets around the world over the past decade has created pressing issues of talent and leadership for investor organizations. Since 2010, some $1.7 trillion has been invested in infrastructure assets globally, according to a report by PwC and the Global Infrastructure Investor Association (GIIA).1 And transaction volumes and their value have risen sharply during that time (Figure 1).
In addition, more investors are entering the market, increasing the competition for assets, driving up prices, and reducing the level of return. In this now crowded field, investors must manage their infrastructure assets more adeptly than ever if they are to identify and make the operational improvements necessary to gain a competitive edge in both the pricing and acquisition of assets as well as in achieving the desired returns. This means ensuring they have the right talent to manage their infrastructure asset portfolio and the right management to lead their portfolio companies.
We have seen a marked increase over the past 18 months in investors seeking to build or strengthen their infrastructure asset management teams and take an increasingly hands-on approach to the long-term management of portfolio assets. This has resulted in a variety of key talent and leadership challenges, including the following:
- Finding the right talent from diverse professional backgrounds to manage the investor organization’s infrastructure assets
- Helping talent new to asset management adjust to the unique demands of an investor organization
- Ensuring that deal teams and asset management teams work hand in glove
- Assessing leaders and executives in portfolio companies to ensure that they have the leadership capabilities required to optimize asset performance
In infrastructure asset management, as in other intensely demanding settings, talent and leadership remain the great differentiators. Investor organizations that meet the challenges of talent and leadership will be better positioned to compete under the terms of today’s brutally competitive infrastructure market.
Seeking new talent from diverse sources
Instead of seeking asset management talent, as many investor organizations are now doing, they could simply have their best deal makers manage the investor’s portfolio of infrastructure investments. But as a London-based head of asset management at a pension fund put it to us: “Would a football club use its best striker as a goalkeeper?” Certainly not, and neither should investors expect their top deal makers to do double duty as infrastructure asset managers.
Where, then, should savvy investors look for the asset management talent they need? We have found that successful candidates typically emerge from one of three backgrounds (Figure 2):
- Operations/industry. This includes executives who have operational experience at a major construction company, transportation organization, utility company, or the like—experience perhaps gained in the C-suite. Alternatively, they may have specific technical expertise in areas such as engineering, risk, and regulatory issues, or they may be commercially oriented executives who can think and act like investors. Such leaders bring industry expertise and deep knowledge of best practices in operations, governance, and stakeholder management. They speak the same language as the managers of the companies in the infrastructure portfolio. They can influence and mentor management and lend a hand where needed. Typically, they sit on the board of a portfolio company and work closely with the management teams on capital investments and tuck-in acquisitions. And compared to the deal professionals, who have to focus on deal execution and origination, these industry specialists are much closer to the actual assets.
- Finance.This encompasses executives with strong financial skills, such as chief financial officers (CFOs), who may have worked in the infrastructure industry. They not only bring many of the industry skills noted previously but can also do a deep dive on the numbers, spot potential financial problems, and preempt them. A few investors have hired former M&A or project finance bankers (some with engineering backgrounds) who have deal-making experience as well as the financial acumen.
- Consulting. Executives on the asset-optimization teams at major consulting firms can bring their experience working with a wide array of investors to create value-enhancing strategies. Also, they typically have broad geographic and sector expertise, know what best-practice asset management looks like, and are adept with the numbers.
No matter the background of the asset managers, it is essential that they maintain an open and honest relationship with the portfolio company management team. Information must flow freely in both directions to enable execution on the investment thesis and to plan properly for potential risks to the business.
Some investor organizations are bringing in even more specialized talent in response to specific issues (Figure 3). This helps them tackle areas of increasing concern, such as the following:
- Government relations. Especially in the United States and Canada, some larger investor organizations are seeking government-relations professionals to influence emerging legislation designed to foster the development of private-sector infrastructure. They are also being sought to work with investment teams on due diligence of regulatory issues in potential transactions. The best of these professionals maintain extensive government networks, know the legislative process, possess strong commercial acumen, and are adept at managing internal and external stakeholder relationships. And their skills can be leveraged across the entire portfolio, advising the board of the investor organization on regulatory issues and options for their resolution.
- Disruptive technologies. Technology continues to disrupt industries on a global scale, forcing organizations to pivot, reposition, and diversify their business models—and this is no less so in infrastructure than in other sectors. The way infrastructure is built and operates will be transformed by a dazzling array of emerging technologies: autonomous vehicles, drones, the Internet of Things (IoT), artificial intelligence (AI), smart cities, and smart grids, to name a few. Autonomous vehicles, for instance, carry profound implications for parking lots, toll roads, traffic flow, safety, and public transportation generally.
For investor organizations, these revolutionary technologies will pose fundamental questions of strategy, capital investment, and operating models that will require expertise in how to maximize the performance of the portfolio in the face of startling new developments.
At the same time, investors will need expertise in two other technological areas—data analytics and cybersecurity—that have become perennial challenges across industries in recent years. We have found that most investors are contemplating how best to leverage customer data within their portfolio companies, not only to optimize pricing but also to manage and plan capital investments by understanding and influencing both supply and demand. Designing systems to collect, store, and analyze business-related data is essential for properly managing the business through enhanced understanding of business seasonality and cyclicality and trends in supply and demand. They are also confronting the very real threats to cybersecurity—threats posed not only by criminals (like those who recently attempted to cripple Great Britain’s National Health Service through a ransomware attack) but also by malign governments whose cyberwarfare plans undoubtedly target critical infrastructure.
To assess the quality and durability of the technology functions in their portfolio assets, investors may consider recruiting technology talent to the board. Others will look to have someone on their asset management team who can assess and monitor the strengths of the technology capability across the portfolio and identify opportunities to leverage innovation from one asset to the other. One investment firm has created an “IT Directors Club,” bringing in technology experts from a variety of industries, as well as academia and the start-up community, to brainstorm and apply best practices to the firm’s portfolio infrastructure assets. Such “clubs” can operate much like a non-executive advisory board, meeting quarterly and being remunerated through an annual retainer or on a per diem basis.
- Environment, social, and governance (ESG). Investors are increasingly focused on adhering to the highest standards in ESG. This includes sustainability, diversity and inclusion, human rights, labor practices, executive compensation, employee relations, and board independence. Why? Because they have found these factors affect long-term performance. Although still learning, these investors are more systematically analyzing ESG in their investment process and know more about the impact of ESG factors on financial returns than they did in the past. Many portfolio boards are assessing and seeking talent able to ensure that ESG analysis is embedded in their investment decisions and daily operations.2
Fish out of water?
Beyond bringing highly prized skills, new asset management talent will need to adjust to the unique demands of portfolio management, long-term investment horizons, and unfamiliar company cultures. Many of the behaviors required of new team members may be diametrically opposed to reflexes they have developed over years in a particular sector, company culture, or region. And the more senior the talent, the more deeply ingrained those reflexes are likely to be. The critical challenges of adjustment, say the leaders of investor organizations we work with, include the following:
- Working with more than one portfolio company across a multitude of sectors and geographies. This can be particularly challenging for people who have spent the bulk of their careers in a specialist sector or a single region.
- Influencing a broad range of internal and external stakeholders. These include investment professionals, leadership teams of portfolio asset companies, co-investors, customers, policymakers, regulators, and the communities in which the infrastructure assets operate.
- Moving from a transactional mind-set to an “owning the outcome for the long term” mind-set. This can be particularly challenging for former bankers and executives who are accustomed to focusing intently on short-term results.
- Serving one employer instead of working for a multitude of clients. This applies primarily to former consultants, who are accustomed to simultaneously serving many clients. And they will have to adjust their time horizon from the 3 to 12 months of a typical consulting engagement to owning the results for the long term over the hold period of the infrastructure investment.
Working hand in glove with the deal teams
In many asset management firms, deal teams and asset management teams operate almost independently. The deal team sources investment targets, performs due diligence, executes the transactions, and then hands the assets over to the asset management team. Often, the asset management team encounters issues that have been either insufficiently explored during due diligence or deemed not important enough to highlight to the asset management team when the asset is transferred. This often results in finger-pointing between the deal team and the asset management team and, more important, in costly delays in addressing issues that affect returns.
In our experience, the most successful investors pair their asset management teams with the deal teams from the outset of a potential transaction. The asset management team is involved from the early phase of due diligence and provides input all the way through closing. When the asset is handed over, the asset management team knows the details of its operation and is intimately aware of issues that may subsequently arise. By partnering in this manner, essential knowledge is less likely to fall through the cracks, transitions tend to be seamless, and the two teams develop a rapport that strengthens the work of both.
Assessing leadership in portfolio companies
A change of ownership represents a critical inflection point for an asset. And for the new owner, and specifically for the asset management team, it raises a host of questions: Will the old ownership culture prevail? Is the CEO prepared for an increased level of direction and involvement from the new board? Can the presale CEO, who was formerly incentivized to enhance the brand of the asset, adapt to the new reality? Is the incentive program the only glue that holds the management team together? Is the current leadership team up for the job?
Formerly, the new owner might look for promising signs, such as a CEO or CFO who proactively reaches out to the investor organization for guidance. Or it might make judgments and decisions about management and the culture based on gut feel or unsystematic observation. But given the manifold uncertainties of an ownership transition and now widespread acceptance of the notion that talent is the ultimate differentiator, we have seen a significant increase in the assessment of senior management in portfolio companies by both infrastructure and private-equity investors. They want to ensure that the leadership team is fit to deliver the investor’s business plan. A leadership assessment can also help determine whether the management team has the right team dynamics to deliver on the new owner’s objectives and required returns.3
When possible, some investors prefer to conduct leadership assessments during the due-diligence phase of a transaction. Where this is not possible (for example, in an auction process), we find that many investors now routinely carry out a leadership assessment within the first 100 days of taking ownership. Others perform leadership assessments periodically. And we know of two pension funds that have even added specialist HR talent to their infrastructure investment teams to oversee the human-capital aspects of long-term asset management, indicating the increased focus investors are putting on leadership assessment in their portfolio assets.
The top firms will continue to bolster their infrastructure asset management teams and will thus influence—and even propel—the next wave of improvements in global infrastructure. As we’ve found, they are now doing so on many fronts. They’re hiring strong asset management talent and integrating it more effectively with their firms, deal teams, and portfolio companies. They’re embracing new technologies, making sure assets are safe from cyberattacks, and bringing in specialized talent to focus on government relations and raise the bar in ESG. And many firms are systematically assessing the leadership and cultures of their portfolio companies. Accordingly, the demand for the best asset management talent, from whatever source, will remain high and will likely increase as investors explore new market segments and seek to redefine infrastructure itself.
About the authors
Marcus De Luca (firstname.lastname@example.org) is a partner in Heidrick & Struggles’ London office; he leads the global Infrastructure Sector.
Golnaz Yekrangian (email@example.com) is a principal in the Toronto office where she covers infrastructure for the Financial Services Practice in the Americas.
1 PwC and Global Infrastructure Investor Association (GIIA), Global Infrastructure Investment: The Role of Private Capital in the Delivery of Essential Assets and Services, 2017.
2 For a look at how forward-looking boards are addressing ESG-related issues, see Jeremy C. Hanson and Sachi Vora, “Boards and sustainability: Three best practices,” Heidrick & Struggles, May 9, 2017.