We are, however, seeing a number of significant changes and trends in the industry that are starting to alter the fundamentals of the managed infrastructure fund model. Some are related to the global financial crisis and Europe’s continuing sovereign debt challenges. But they are just as much driven by more active and influential types of investors who are demanding more value from their infrastructure investments.
A core preference
For example, most infrastructure funds have started to place an almost single-minded focus on investing into core infrastructure (such as regulated utility assets or regulated transport) which, in turn, has driven some fairly feverish activity around some of these assets (HS1, OGE, Vattenfall, Endesa). What is interesting is that this trend is being driven largely by the fund’s Limited Partners, who are starting to take a hard look at the types of assets that are within the portfolio to make sure that they meet their investment goals.
In this, many sector participants and observers will recognize the impact of some high-profile scuffles between investors and managers over the underlying asset class of their funds. The very public admonishing in 2010 of Henderson Group over the deployment of their PFI Secondary Fund II into the assets of John Laing – an infrastructure development company – has sharpened minds within fund management circles as to what investors will and won’t accept.
The West goes East (and South)
There has also been increased momentum in the trend towards developing and emerging market investments evidenced by a rising number of funds focused on Asia, and in particular, China and India. Macquarie Group joined China Everbright to close a fund of almost USD500 million, Challenger Financial Services and Mitsui (a Japanese trading house) closed a USD275 million fund focused on China and India and JP Morgan raised and then quickly deployed more than UDS850 million into assets in India and China.
There is also ample evidence that the trend will extend to other emerging markets as well. In South America, a growing maturity in PPP structures is starting to spin out a strong secondary market in countries like Chile and Brazil, which are starting to attract the attention of fund managers, and Peru and Colombia seem set to follow.
Eurozone crisis slows sales
But the move towards the emerging markets is also being driven by investor concerns over the ongoing debt crisis in the Eurozone which has created significant uncertainty in both country and currency risk. So while Greece has put – or is about to put – more than 50 assets on the block and Ireland has made overtures in the port, airport, gas, electricity and utility sectors, many fund managers are sitting on the sidelines worried that an investment that is made in Euros today will saddle them with liabilities in some other currency in the future.
And while this has meant that some of the countries most in need of the revenue brought about by secondary asset sales to infrastructure funds are holding back their divestitures for fear of mismatch between buyer and seller expectations, it has also forced the funds themselves to look to other markets in order to deploy their capital.
Cutting out management costs
The fund model is also starting to evolve as a result of a growing number of large institutional investors moving towards more direct investment strategies. Most pronounced have been the rise of the Canadian Pension Funds like CPP and Borealis who have developed a significant capacity for not only directing, but also closely managing, their infrastructure investments. Their lead has been taken up by a number of other Pension funds: PGGM in the Netherlands has signed a spate of infrastructure deals, as has USS, the second largest pension scheme in the UK who made their first significant purchase in the infrastructure space at the end of last year.
As a result, some of the fund managers (particularly those with a track record) are starting to evolve their service offering to provide pure advisory services to direct investors and we are also seeing a significant increase in the number of co-invests being required and taken up by Limited Partners. Given that many new investors are somewhat inexperienced and understaffed in their direct investment capabilities, this change in model should be both a welcome and successful change.
Full speed ahead
That said, the managed fund model is certainly not disappearing any time soon with some two-thirds of Limited Partners indicating they still intend to invest in unlisted infrastructure funds, demonstrating a strong future for the growth and development of future funds, particularly from the managers that have already raised and deployed second and third funds.
Infrastructure is clearly building a reputation as a unique asset class in its own right and – as managers and investors start to engage in greater dialogue about what does and does not constitute an appropriate investment – we expect to see a strong future in the cards for infrastructure investors overall.
By Tony Rocker, KPMG in the UK