Season 10 - Nicolas’ projects

Episode 1 - Q1 2021: What financing model should Midnight Trains use?

Romain Payet — We're getting into the hard part, which is the financial side, and we're starting the season with Midnight Trains' second fundraising campaign… This began in 2021, when we were thinking about how to finance Midnight Trains. As a new rail operator, we have to finance two very different things. On the one hand, our assets: the trains themselves. On the other hand: the operational part of the company (which takes more traditional financing). This is an essential point as it’s not the same types of investors who are involved in each part. So-called infrastructure funds like to finance tangible assets with a very long-term vision, perhaps several decades long, and have a yield that’s often lower than others due to the collateral they hold. Venture capital funds, conversely, get involved very early in the venture, are ready to take commercial risk without assets and have a very high yield to remunerate this risk over a shorter investment horizon, which is a maximum of ten years. Growth funds like to finance the growth of the company, once the economic model has been proven, with a yield somewhere between venture capital funds and infrastructure funds.

On the question of financing trains, there are two potential scenarios. In the first, we become owners of our trains and put them to use - Midnight Trains buys its own trains, with its own funds. In the second, our trains are purchased by another structure which then rents them to us. This could be an entity that we would have created ourselves and possibly financed by the same investors as the operational part. You can also turn to a ROSCO, a rolling stock company, which rents locomotives and passenger carriages.

Nicolas Bargelès — Like many things in finance and business, ROSCOs came out of the UK. In 1996, when the country opened access to its rail, new entrants were faced with the problem of accessing rolling stock. It’s a bit like us today really. It was at this time that ROSCOs developed, so that new rail players could launch without having their own locomotives and carriages. However, this type of economic model has already existed for a long time in the airline industry. It’s the status quo there, with no airline carrying more than a quarter or a third of its fleet in assets. Air France, for example, only owns 30% of its planes.

Adrien Aumont — Right now, as we’re in a startup mindset, we’re trying to be as asset light as possible. In addition to air travel, we’re inspired by the financial arrangement of FlixBus and FlixTrain. Our objective is to prove the effectiveness of our model, rather than demonstrating our solidity by owning assets as is done in the most industrial sectors. ROSCOs appear to be an excellent way to stay within this logic. Thanks to them, we’ll only have to raise funds for the operational part. And this could correspond to funds from Venture Capital (VC).

Romain Payet — As you will have understood, transferring our assets to a ROSCO is a natural choice. It has to be said though, we had the least control over this aspect of financing. So you might as well entrust it to someone else. In addition, the financial amount this represents is much more important than the operational one. If we manage the financing of our trains through a ROSCO, we’ll definitely be able to do the rest. These companies don’t simply rent rolling stock though - they’re experts in the field. They’re capable of challenging our business plan, long-term hypotheses, as well as our design choices, carriage layout and choice of manufacturer. That’s the level of expertise we’re talking about here. They can carry out technical audits on very different plans from each other. They have the tools to verify the correct completion of even the smallest welds on our future trains. Which is pretty tempting as we don't come from the industry and most of our railway expertise sits with Nicolas. Despite his very broad range of skills, we can’t have him doing everything.

Nicolas Bargelès — Finally, ROSCOs have expertise throughout the contracting phase, with the manufacturer and quality control when they receive equipment. When we're talking about locomotives and millions of euros worth of cars, these are absolutely essential skills. All of this shows that having the skills, knowledge and experience of a ROSCO on our side could reassure our future investors. All that’s left to do is to shop around the market.

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