The anatomy of a deal

Investing in infrastructure involves an array of skills above and beyond merely owning an asset. Sourcing deals, winning contracts and managing assets all involve significant amounts of time, experience and consideration. We bring you the second article in a three part series that looks at the origination process and what goes on behind the scenes of some of the major infrastructure deals that shape the AMP Capital Core Infrastructure Fund.

Part 2 – Domain Aged Care

Domain Aged Care is a Queensland-based nursing home group that owns 16 residential aged care facilities in Queensland, NSW and Victoria, with four further facilities under development. In February this year, Domain Aged Care was acquired by Principal Healthcare Group which is owned by funds managed by AMP Capital.

The nursing home sector is, in our view, an attractive social infrastructure asset class and is characterised by:

Growing demand for services – Long term demand for aged care services is underpinned by an ageing demographic in Australia. The Australian Bureau of Statistics expect more than 4 million people to be over the age of 70 by 2060, some 15% of the population;
A fragmented industry, with scope for future consolidation. There is considerable scope to grow the business through acquisition;
Barriers to entry through the requirement to obtain bed licences from the Federal Government and to maintain compliance with the government regulations; and
Revenues underpinned by Government funding – Revenues are underpinned substantially by Federal Government funding and a favourable regulatory environment.

From detailed sector research, AMP Capital had identified Domain Aged Care as an attractive investment opportunity on a stand-alone basis and as complimentary to Principal’s existing business and facilities. In contrast to the public tender process of Reliance Rail (as featured in last month’s newsletter), Domain Aged Care was initiated by AMP Capital and completed as a private transaction. To initiate the deal, we approached the Managing Director of Domain Aged Care and expressed our interest in potentially acquiring the business. An exclusivity period was then negotiated directly with the owners of the business. “This enabled us to confidently spend time and money on extensive due diligence and the preparation of a binding offer,” said Michael Bessell, AMP Capital Infrastructure Investment Manager.

A team of specialist skill sets was assembled to undertake comprehensive due diligence to assess the investment merits and risks of the business. The team comprised internal sector specialists and financial structuring professionals alongside external advisors and industry consultants. Sophisticated financial modelling enabled 25 year cashflow forecasting and scenario analysis to understand changing factors such as wages growth, interest rates and other major cost and revenue items. The team also analysed sensitivities such as litigation, potential tax liabilities, superannuation issues and operating processes. In parallel to financial analysis of the business, the physical condition of the facilities was also subject to a thorough assessment.

“Following many late nights and reams of legal documentation, the final negotiations cemented the price, warranties and other fundamental conditions”, said Michael.

AMP Capital believes Domain Aged Care’s experienced management team, reputation for quality, solid growth track record, and substantial property portfolio makes this a very attractive investment for Principal Healthcare Group, which following the acquisition, is the largest for-profit aged care provider in Australia.

Find out more about the AMP Capital Core Infrastructure Fund