LaGuardia Airport Is a Mess. An Engineer-Turned-Fund Manager Has a Fix

(Bloomberg Markets) -- Thierry Déau’s engineering training in France led him early in his career to building government-funded infrastructure. But it was his entrepreneur father back home in Martinique who inspired him to strike out on his own in 2005. He started Paris-based Meridiam to finance, build, and manage long-term projects. Now, with €7 billion ($7.83 billion) in seven funds and nine offices across Europe, the Middle East, Africa, and North America, Meridiam is playing a key role in high-profile projects such as the upgrade of New York’s LaGuardia Airport and a road tunnel under the Port of Miami. Déau describes Meridiam’s investment approach in an interview with Bloomberg Markets.

SREE BHAKTAVATSALAM: What led you to start Meridiam?

THIERRY DEAU: First of all, I am an engineer. I still don’t define myself as a financier. I think finance is a means to produce other things. In the first part of my career, I actually built things and invested for governments and the French development banks. It was about how you invest to create better service and how do you maintain that in the long term. Clearly that triggered for me the need for an investment that is much longer than the typical private equity investment. So [that led to] creating a 25-year fund to really think about optimizing the investment and the infrastructure over the long run.

SB: What’s involved in thinking about a 25-year investment?

TD: Obviously that immediately creates the focus on the outcome for the public—environmental, social, and governance issues. ESG is a very stringent engineering process; it’s not painting things green and putting a stamp on it and having some fancy marketer come talk about it. Our ESG person here is an engineer who has been in this for years. So we’ve taken that to include the Sustainable Development Goals from the UN. If we can address probably five of the 17 clear goals of ESG in a significant way with our strategy, that’s worth using to show where we produce impact. So whether we are talking about clean energy, resilient infrastructure, good jobs, or economic growth—especially when it comes to emerging markets—we can clearly show how we contribute and quantify it over the long run.

SB: What kinds of investors are most drawn to this?

TD: Probably 95 percent of our investors are very much driven by these same [ESG] issues. Probably about 10 or 15 percent of our AUM [assets under management] comes from development banks. They are the kind of investors we used at the beginning to help us build up our methodology and standards. And then about 50 percent of the money we manage comes from pension funds—a lot of public pension funds but private as well. And the last bit is really coming from insurance and life insurance. So I must say that at the beginning we had maybe 10 to 15 investors, and they were very much people who were looking to do these kind of things. We grew to about 60. I would say that the first 45 were naturally doing it, and the rest we had to convert. There’s always a lot of concern about how much it’s going to cost in returns. This is a fake debate. You can create impact without necessarily costing returns.

SB: What kind of return can investors expect? The Harvard Business School case study of the Madagascar airport said 12 to 15 percent was the target. Is that the norm?

TD: The risk-adjusted return that we target depends on whether you’re in a developed market or an emerging market and on the risk specifics of the project. The range is probably a bit higher than that for emerging markets, but clearly it’s an either low-teens or high-teens type of [percentage] return. But these are 25-year returns, so they don’t come overnight.

SB: How does volatility factor in?

TD: It comes from whether you can actually deliver the cash flow that you signed up for when you closed the project financially. Then you can have volatility from the counterparty that you contracted with. There are certain volatile counterparties—people call that political risk. It exists in every jurisdiction, not just emerging markets, because it’s linked to public perception of your project. One way of dealing with that is actually making sure that satisfaction and engagement with the users and the beneficiaries of the infrastructure are at the highest level.

SB: What’s your process when you evaluate countries?

TD: I can describe what the perfect country is for us: The perfect country has good financial standing but also an administration capable of engaging over the long term. If we stay for 25 years, we also need to partner for 25 years or more. The administrative capacity of the country is very, very important for us before engaging. That is also why we want to support as much as possible countries and regions in a capacity-building exercise. It’s about managing the complexity of these [projects]. You need engineers, lawyers, financiers to sort of merge into one pool of people.

SB: What attracted you to the LaGuardia Airport project?

TD: The Port Authority [of New York and New Jersey] has a lot of [administrative] capacity, and so that makes it more attractive to have a client that actually knows what they’re doing. It’s not always the case. And then it was a bit of, you know, we’ve all come through that terminal and thought, Oh, God, what are we doing here? Is this the U.S. or is this, you know, some sub-Saharan city?

We were able to build the new central terminal before destroying the old one and then do all the concourses. That phased approach to maintaining operations while building has been critical. So a lot of thinking was done with a full focus on all the stakeholders’ interests, because if you miss a few, then you end up with the wrong design and with the wrong approach.

So we created that group [LaGuardia Gateway Partners, with Skanska, Vantage Airport Group, and JLC Infrastructure], we bid it. There are two rounds and a number of discussions with the Port Authority. [Former U.S. Federal Aviation Administration chief] Jane Garvey, with her background in aviation, led the discussion for us. So that was quite successful. But I think price and things weren’t the real driver in terms of winning. It was addressing all of these different issues and managing risk—environmental risk for an airport is very high, and the construction risk there was also very, very high.

SB: Does it help you to have a network of people with a lot of experience in the public sector?

TD: I have a number of people who’ve actually managed and done things in the public sector—not necessarily on the political level but in the administration, delivering infrastructure, who have dealt with the unions, stakeholders, have been in public hearings about projects and understand how tough it is. And we have people from the industry, from contractors, developers, or operators. We have very few people who are purely financial within Meridiam.

SB: Do you deploy funds when you see opportunities, or do you raise pools dedicated for certain purposes?

TD: No, we raise on a regular basis basically regional funds. We typically have three and a half to four times more money signed up than we need. So we scale back investors. Today this $7 billion or $8 billion that we manage has been tranches of $1 billion or $2 billion at a time. And on top of that, our management side is growing. Today we have 73 projects in 23 countries with a combined capex [capital expenditure] of about €50 billion.

SB: How do you structure your fees?

TD: The funds are based on the typical sort of management fee and carry structure, but the carry goes to a pool for the individuals. The company itself really only runs on the management fee. But we also have a labor-intensive approach because we have probably two or three times more people than most funds that are doing the same thing in the market in a different way. And so if investors request, we give them our accounts, and they get what we do.

The other interesting bit is the way the carry works on a 25-year fund, which we had to invent. Carry is actually distributed halfway through, at Year 12 and in shares. So you become co-LPs, and you can liquidate those shares gradually. You need to keep a small bit of it basically as a pension fund for 25 years.

So it also attracts a different type of profile of people who certainly can make money out of carry, but there is a long-term commitment because you’re basically putting some of that in your pension plan.

Bhaktavatsalam is managing editor for finance and investing news in Europe, the Middle East, and Africa.

To contact the editor responsible for this story: Christine Harper at charper@bloomberg.net

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