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Edited Transcript of JLG.L earnings conference call or presentation 20-Aug-20 8:30am GMT

Half Year 2020 John Laing Group PLC Q&A For Analysts And Investors Conference Call

London Aug 20, 2020 (Thomson StreetEvents) -- Edited Transcript of John Laing Group PLC earnings conference call or presentation Thursday, August 20, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ben Robert Loomes

John Laing Group plc - CEO

* Kellie McAvoy

John Laing Group plc - Head of IR

* Stuart Colvin

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Conference Call Participants

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* Alexander Wheeler

RBC Capital Markets, Research Division - Analyst

* Anand Dhananjay Date

HSBC, Research Division - UK MidCap Equity Analyst

* Andrew Shepherd-Barron

Peel Hunt LLP, Research Division - Analyst

* Michael William Sanderson

Barclays Bank PLC, Research Division - Co-Head of Diversified Financial Research

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the group -- to the John Laing Group 2020 Interim Results Call. My name is Ruby, and I will be coordinating today's call. (Operator Instructions)

I will now hand over to your host, Ben Loomes, Chief Executive, to begin. Ben, please go ahead.

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Ben Robert Loomes, John Laing Group plc - CEO [2]

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Thank you very much, Ruby, and good morning, everyone. I'm here with Stuart Colvin, who's the Group Finance Controller; and also Mark Westbrook, who's a member of the senior management team. What I'll do now is hand over to Ruby to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Alex Wheeler of RBC.

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Alexander Wheeler, RBC Capital Markets, Research Division - Analyst [2]

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A couple of questions from me, please. Firstly, Ben, you noted in the presentation that there have been too many surprises over the last 12 months. Are you confident now that the asset valuations are reflective of negative headwinds, namely on the renewable side?

And secondly, I'm just interested to know how fluid is the pipeline. So I know that you've listed out -- obviously, you're shortlisted bidder positions with -- awaiting towards 2021 and then a few in subsequent years. I'm just curious as to how much scope there is to go after more projects there in the near term?

Should we see 2021 as relatively full, given that there's quite a weighting there and then expect it to fill out further in '22, '23? Or is there opportunity to get after more projects there in the near term? And then finally, I guess, just on when you expect some of these new investment opportunities to flow through and have an impact on portfolio valuation.

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Ben Robert Loomes, John Laing Group plc - CEO [3]

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Great. Thank you very much, Alex. So if I start with your first question on NAV, look, the John Laing team has been through the normal evaluation process. It's been a detailed process and it's been independently valued. So we are comfortable that the valuations are robust. And it means that we start with a very solid base for NAV. And you'll see in the outlook statement that we're expecting in the second half modest NAV growth, excluding foreign exchange.

On your second question around the investment pipeline, after some short-term delays in bid processes caused by COVID-19 this year, I'm particularly pleased to see the momentum coming back. And as you've seen in the release, we've actually seen an uptick in the pipeline for shortlisted bids going into 2021. And in the last month alone, we've seen 3 new shortlisted bid positions. So I feel confident in the pipeline that's building into 2021. To sort of add to that, we are seeing good growth more broadly in the infrastructure market, both in our core PPP business as well as in non-PPP opportunities in areas like energy transition and digital infrastructure. And I want to make sure that John Laing gets its fair share of that growth.

So in general, we're seeing a good momentum returning going into 2021. You can see that from the shortlisted bid positions. But I think that the scale of the opportunity is very significant, both in PPP in our larger markets such as the U.S. and Australia but also in some of those newer sectors like energy transition and digital infrastructure, where governments around the world are looking for more private capital to invest in those areas as they stimulate their economies. So I think we've got a good pipeline going 2021. But I would like to grow that pipeline further.

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Operator [4]

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So we have a question from Andrew Shepherd-Barron of Peel Hunt.

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Andrew Shepherd-Barron, Peel Hunt LLP, Research Division - Analyst [5]

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On the -- I suppose my focus is on the new strategy because, of course, it's new and it's still presumed an evolving process. Could you talk a little bit more about how long it's going to take you to actually put money into these new projects, which are effectively new to John Laing, and whether or not you are going to be able to value them in the same sort of way that John Laing valued things in the past? And how long it will take, do you think, to prove to the market that they create value?

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Ben Robert Loomes, John Laing Group plc - CEO [6]

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Thank you, Andrew. So I think the first thing to say is that we still believe strongly that there is value that we can create and we can grow in our core greenfield PPP business. So that remains core. What we're looking at in addition to that, which really is a response to where we're seeing additional growth in the infrastructure market, is in some of these new sectors. And we are already seeing a good level of opportunities coming through in those sectors that we're already bidding to evaluate. So this is not something that where we're starting from a standing start. We're already seeing a good flow of those opportunities. What I want to do is make sure that we have the right skills and capabilities so that we can assess those opportunities properly and make sure that we can get them at attractive returns that suit John Laing. So what the strategic review is about is making sure that we have the right capabilities and that we are positioned well to capture that additional growth. And I'll talk more about that in November.

But if I say a few words about what we like about those sectors is that, firstly, they are not public procurement processes. So therefore, as you know in PPP, the lead times can be quite long going through both the bid process and then obviously through the construction period. And so that takes time to invest money and to make a return. These sorts of non-PPP sectors tend to be more like M&A processes or private equity. And therefore, the lead times are shorter and the ability to scale those opportunities is greater. So I would see the business having sort of 2 areas: our core PPP area, where we have a very good track record and where we see a good flow of opportunities in our large markets like in North America, Australia; but an additional piece, which is really around these new sectors, which we think is complementary, delivering similar financial returns but providing additional scale and additional growth. So we are already seeing opportunities and we are already adding expertise. And I would hope that we can start to make an impact in 2021.

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Andrew Shepherd-Barron, Peel Hunt LLP, Research Division - Analyst [7]

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Okay. And just following up on that, in the presentation, you've got a comment there about sort of enhancing disclosure. Funny, actually, I really thought that John Laing's disclosure was pretty good but maybe not appropriate for the way the businesses came to going forward. I just wonder if you could talk a little bit about that. And also perhaps, if you -- if there is anything you can say about Luciana's departure.

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Ben Robert Loomes, John Laing Group plc - CEO [8]

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Okay. Thank you, Andrew. So I think on disclosure, it's good to hear that you feel it's in a good position today. What we would like to do is a few things. One is, given we are providing details of our shortlisted bid positions, we'd like to enhance that disclosure so that you have a better feel for those projects and not only the nature of those projects but the size of the opportunity and the timing of them. So we've started that process in this RNS by providing the revenue types and we'll look to do more with that. We'd also like to provide, as we have done here, more details around the segmentation of the portfolio.

So you can see the differences between, in this case, PPP and renewable energy, but in due course, obviously, PPP and some of these new sectors. So you can see the contribution that each of them make. And then I think more broadly, we show some details of our projects. But we would like to, at the year-end, show more extensive details across each of the projects in the portfolio so that you have a better feel for the makeup of the portfolio. So those are sorts of things that we're looking at. And I think you'll see more disclosure at the year-end results.

I think on your second question, on Luciana, clearly, there was a press release made about that several weeks ago. There's a limit to what we can say. I can say 2 things. One is that the search for a new CFO is well underway. And the second thing to say is, obviously, Stuart, who's with me today, has been part of John Laing for a long time, for 16 years as part of the team and has stepped up here to manage the transition. We've also hired a new Group Head of Finance, who joined us several weeks ago. So I'm very comfortable we've got very good resource and bandwidth through this transition period. And as soon as we get there, we'll obviously announce the new CFO.

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Operator [9]

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And we have a question from Anand Date of HSBC.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [10]

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I've got several, actually. Ben, just on the confidence -- going back to the point on NAV and the confidence that you can have, could you talk a little bit about power prices had been in structural decline, it's been very challenging there. Clearly, you guys will be on top of what you can control. Could you give us some sense of how conservative your forecasts are on the macro issues specifically now? Can we have confidence that, unless something goes dramatically wrong, those should be pretty concrete? And then maybe I'll do one question at a time, if that's okay.

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Ben Robert Loomes, John Laing Group plc - CEO [11]

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Sure. Okay. Thank you very much, Anand. I think it's a good question on sort of NAV and on the power price and macro assumptions. So if I take the first one on power prices, we, like others, look at various price forecasts that are in the market in each of our regions. What I would say this time around, I've been doing this for some years in other firms when we've looked at valuations of renewable assets, what I would say this time around is that the range of power price forecasts is wider than I've seen before. So when you look at the high-quality providers of power price forecasts, there is quite a range in each of our markets, which I think is a reflection of, frankly, that we've been through a very unusual period with the pandemic, which has caused a lot of uncertainty and in particular around power demand.

So it is a relatively wide range of forecasts. We have been conservative, and we have taken what we believe to be prudent assumptions within that range, around the midpoint of the sort of power price forecast that we're seeing. So we feel comfortable that, that's a sort of robust and prudent position on power prices. I think it's also worth saying, and we've said it in the release, that we are focused on realizing our renewable assets over the next couple of years to reduce that exposure. So we think we've taken a good, prudent view, but we're also in the process of reducing our exposure.

I think on the second point, which is a very good point, we, like others, have our long-term assumptions on inflation. And inflation is the larger driver of all the macro assumptions that we use. We have not changed our view on long-term inflation. But what we have done to reflect the fact that inflation has dropped in the short term in our markets is that we've taken our short-term assumptions in the next 1, 2, 3 years down. And I think we've taken -- again, we've looked at all the market commentators and economic forecasts that we've taken something that we believe is conservative. What I would say though is if the pace of economic recovery is better than people expect, then we would hope that some of those short-term inflation assumptions reverse out and provide upside. So I think in both counts, both power prices and the inflation, we've taken a conservative view. But we haven't changed, in terms of inflation, our long-term view on inflation in the forecasts.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [12]

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Okay. Stuart, I was wondering, could you talk a little bit about the pension outcome? Is it a little bit disappointing?

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Stuart Colvin, [13]

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Thanks, Anand. You're talking about the actuarial evaluation on the pension fund?

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [14]

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Yes. The payment start, I think it's 2023.

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Stuart Colvin, [15]

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Yes. So just to provide a bit of detail on that. So we're talking about the John Laing pension fund. We also obviously have the smaller pension plan. So the John Laing pension fund, it's triennial actuarial valuation as at 31st of March 2019. It was completed in April -- end of April of this year. The deficit -- the overall deficit reduced by GBP 70 million over those 3 years. And it's now just above GBP 100 million now. And the reduction is very close to the amount of cash that the company has put into the fund over those 3 years. We've also agreed with a trustee a new payment plan. We've pretty much kept to the existing plan with 4 remaining payments under that. And as you alluded to, there has been a very small increase in the total amount that we will pay off of GBP 3 million.

I guess that's your judgment about the outcome. But as I said, it's reduced by the cash contribution, which is -- we see that as a positive. And over that 3 years, it's also had to reflect the GMP equalization that some of you will remember, there was an exceptional 20 -- over GBP 20 million hit to our P&L in that year. So that's also reflected in that deficit number. So I think overall, we're pretty happy with that. So on the remaining payments, there's 4 remaining payments, but we've already paid one in March. So we've now just got the one in 2021, '22 and '23 to go on that.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [16]

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Okay. Ben, I've got actually several more for you. Could you -- maybe it's a question for November, but could you talk about some of the early measures you've taken to sort of reach all the business to focus on energy transition, broadband, telco? What are the sort of things that you think need to change? Is it people? Is it processes? Is it getting close to the right partners? And then how far along do you think we are already in that change process?

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Ben Robert Loomes, John Laing Group plc - CEO [17]

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Okay. Yes. Thank you, Anand. So look, we are already seeing quite a lot of opportunities actually across those spaces. And what we want to make sure is that we are really assessing them properly and that we have the right expertise onboard, who's got a sector track record to make sure that we make the right investments. Because there's no shortage of opportunities that we're actually seeing at the moment. So for me, it's about people on the investment team having that sector experience and track record so that we can make the most of the opportunities that we're seeing.

So in terms of -- what I'm going to talk about in November is I'm going to be -- give you much more detail around those types of opportunities. They are different to PPP in the sense that they also don't have the public procurement processes, which is an advantage because it means that we can access them more quickly. And they tend to be platforms or businesses, so they already have some operations. They will have a management team that we can back, and they are more scalable. But with that, you need different skills, both to invest in them and also manage them. And it's similar to what I did earlier in my career in other firms, where we acquired those kinds of assets and I led investment teams in those sectors, where we were very successful both investing and realizing those assets. And I built the team around that. So I'm very confident that we can do the same.

And to give you a sense of momentum, not only are we seeing lots of opportunities, but we're already in the process of adding those skills. So we've already added some people into the business who've got that sector experience. And we are well underway recruiting sort of further investors in that area so that we can really make an impact in 2021. So I think that gives you a sense both of the scale of the opportunity but also the momentum that we've got here.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [18]

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Okay. I've got one more interesting question and one technical, if that's okay. I was just -- so with regards to the increased disclosure, if I look at the preferred bidder and shortlist projects that you've named, 3 of them are -- seem to be volume-based rather than availability. Can we -- or should we read anything into that from that with regards to risk appetite?

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Ben Robert Loomes, John Laing Group plc - CEO [19]

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No. I don't think there's anything to read into that. I think, as you know in our portfolio, we invest in both availability and volume. And we do that to have a sort of diversified portfolio profile. So I don't think there's any change to risk appetite. We just -- we are seeing at the moment a good flow of availability projects. But some of the volume-based projects, particularly in managed lanes, are sizable. So when we look at projects like Maryland, there is a real opportunity there, given both our track record in managed lanes and our credentials, but also the partner relationships we have in that market to really scale that opportunity over time. So I wouldn't read anything into the sort of change of risk profile.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [20]

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And then just very finally, the money multiple charts that you guys got in the presentation, I'm just looking at the one on Slide 9, I think they're great. Just from a technical point of view, is the x-axis, which obviously you haven't given us the labels -- but is the x-axis time and the size of the bubble is total gross proceeds or profit? It's just a technical question.

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Ben Robert Loomes, John Laing Group plc - CEO [21]

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Yes is the answer to both questions. So the x-axis -- the horizontal axis is time and these are the realized valuations, the realized proceeds.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [22]

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Okay. So the growth proceeds. Got you.

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Ben Robert Loomes, John Laing Group plc - CEO [23]

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Thank you very much.

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Operator [24]

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And we currently have no further questions. (Operator Instructions) We have a question from Michael Sanderson of Barclays.

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Michael William Sanderson, Barclays Bank PLC, Research Division - Co-Head of Diversified Financial Research [25]

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Just a couple of quick ones, please. First of all, I'd love you to just talk us through the early warning processes you've talked about in your presentation. I mean, clearly, as you said, there've been a number of surprises emerging out of parts of the portfolio. And I'd just love to know how you feel you're going to get a grip on sort of early warning of these risks in other elements of the portfolio and whether there are any early warning elements flagging up at the moment. The second one was in relation to the IEP sales process. Your comments in the presentation sort of implied that this might not be the best time to sell it, and just love a little bit more color about why that comment was in there. What it is that sort of might delay it, given we are so close to being operational?

The third one, the third question, if that's all right, sits around realizations in general. Sort of with the departure of JLEN and the infrastructure fund over the last couple of years, do you have a team in place that you feel comfortable can get the realizations out of the rate you'd like to get them out at? Or is it just going to stay longer because you've got to scale that team up as well? And then the final question was the new areas that you're investing in. Are you -- are these going to be relatively longer-term holdings as well? Or are they more in the sort of recycling pace that you see renewable? Or do they sit somewhere between the RE and PPP sort of holding period?

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Ben Robert Loomes, John Laing Group plc - CEO [26]

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Thank you, Michael. So let me take those in order. So on the early warning processes, I mean, my experience from having led other businesses on the investment side and on the asset management side is that when issues emerge, you need to be proactive and you need to move quickly. And so what we have done here is that we have got a monthly review, which includes the senior team around all of the regions, both the heads of the regions and the senior asset management teams, who get together with both me and Mark to make sure that the sort of the key issues, and they're may be not issues that are happening right now but emerging risks, that we can address them quickly and we can take action.

So that is a sort of faster process of reacting to emerging risks to make sure that we tackle issues early. I think that's particularly relevant in this kind of environment, where there is just more uncertainty than you would normally see. So I would describe it as more rigorous and sort of faster-paced than we've had before. And I've seen at other places that, that has really paid dividends because it means that you sort of deal with issues early and you protect value.

I think on your second question on IEP, look, it's a great asset, IEP. And we expect it to become fully operational in Q3. It's one that, unsurprisingly, has attracted a lot of interest in the secondary market. Because it's availability-based, it will have a very good long-dated yield profile. And in this kind of macro environment, that's particularly attractive. And so we are exploring whether now is the right time to maximize value and there's a process underway.

But we're only going to sell if we get a good premium for this asset because it will make a very nice contribution to the portfolio. And we're very happy to hold it for a bit longer, if that means that we can optimize value further and get better value in the future. So I think you would expect us as a manager of shareholders' capital to make sure that we get the best possible value. And that's why we're going through the process to explore if that's possible today. So we'll be able to sort of report back on that later in the year.

On your third question around realizations, I'm very confident that we'll make some good realizations going forward. We've got a healthy secondary portfolio. They are core infrastructure assets, which are attractive in this environment. And actually, I think the advantage of us having the ability to sell these assets through competitive third-party processes means that we're going to maximize value rather than having a sort of captive arrangement that we had in the past with a right of first offer.

So as in other firms, I'm very confident that we will be able to maximize value in competitive processes. And we do have a team that's focused on divestments. So we already have that skill set that's been brought into the business earlier this year. So we've made that recruitment. And that's functioning very well. And I think it's a strategic part of our business to be able to not only invest well but to sell well.

And then on your last question, which is a very good question around these new areas. The beauty of these sectors where you're buying businesses and platforms is that it gives you optionality. So to the extent that you buy a platform that has real growth opportunity where you can make incremental investments over time that are accretive, there's an argument to hold them for longer because it makes sense to enhance the return of the portfolio by scaling those businesses and delivering a good yield contribution.

But also, you can sell them. And unlike PPP, where there tends to be a reasonably long construction period and it only really makes sense to sell once something becomes fully operational, the beauty of these platforms of businesses is that they give you more flexibility to hold or to sell earlier or later, depending on how you see the portfolio. So I would see them a bit like private equity businesses. You'd expect to invest over a sort of 3- to 5-year period and then look to realize for value. But there's nothing stopping you holding for longer if you think it's going to grow even further and actually is an optimized value for longer. So I think it gives us more cards to play.

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Operator [27]

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We have a follow-up question from Anand Date of HSBC.

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Anand Dhananjay Date, HSBC, Research Division - UK MidCap Equity Analyst [28]

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I just want to get it out of the way. It's a quick one. If we believe that over the next, let's say, 12 to 18 months you probably -- or you're potentially going to realize more than you invest, could you give us your take on capital structure and how much headroom you need to have versus how much headroom you currently have?

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Ben Robert Loomes, John Laing Group plc - CEO [29]

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Thanks, Anand. So I think we'll obviously come back to this in more detail in November at the strategic review because part of that is to make sure that we've got a efficient sort of capital management process that we manage the balance sheet well. And the 2 things I'm focused on is that we make sure that we deliver good distributions to shareholders, but we also develop funds that we can reinvest as we recycle capital. So we'll talk more about it in November.

But the point I'd like to leave you with is that we want to be in a position where we are well-funded. Because as we realize these assets, we do want to access this growing pipeline that we're seeing in our core business in PPP but also have the ability to deploy into these new sectors, which are growing very rapidly. So we do want to be well-funded, so we can capitalize on those opportunities. But we also want to make sure we run an efficient balance sheet. And so we'll give you more color on that when we get to November after the review has been completed.

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Operator [30]

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We have no further questions.

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Ben Robert Loomes, John Laing Group plc - CEO [31]

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Thank you.

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Kellie McAvoy, John Laing Group plc - Head of IR [32]

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Yes. Thank you, everyone, for attending. And I think that ends the Q&A session.

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Operator [33]

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Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.