A group of veteran asset managers in Boston is looking to launch a new infrastructure fund of funds in the second half of this year tentatively targeting $300 million.
Joe Lyons left his position as president of State Street Global Advisors late last year to start the fund along with two former colleagues, Matthew McPhee and Whit Porter. McPhee was formerly the head of global fundamental strategies at State Street. Porter was formerly vice president at Macquarie Capital Funds in Boston.
They had been working for about a year on a joint venture between Macquarie and State Street when they left to start the fund. They are tentatively calling it Macadam Asset Management, after “macadamisation” – a road building techique pioneered by Scottish engineer John Loudon McAdam.
The trio is formulating their business plan and looking for a business partner and seed investor, so details of their venture are preliminary. But they envisage a global infrastructure fund of funds that would provide investors diversification by underweighting large infrastructure funds and providing more exposure to middle-market opportunities.
“Our product will provide a better net risk profile relative to what people are expecting from infrastructure,” Lyons said, adding that core infrastructure can return anywhere between 8 percent to 15 percent IRRs depending on the underlying asset mix.
Given the lower returns in infrastructure relative to other asset classes like private equity, many investors have expressed concern over paying another layer of fees above general partnership obligations in an infrastructure fund.
“We accept and we know that there will be plenty of doubters, plenty of people who will say, ‘what do I need another layer of fees for?’ and that’s understandable,” Lyons said.
“Our view is that this is an asset class that can probably support 75 to 100 basis points for a fund of funds,” he added. “We won’t be charging any carry and would expect to have a co-investment fund alongside the fund, no carry, straight management fee.”
Investors have to make an assessment whether trading off 75 to 100 basis points relative to their expected long-term returns is worth the benefits a fund of funds can provide, Lyons said. Besides diversification and access to quality managers, Macadam will aim to provide its investors with independent advice and education.
“One of the biggest impediments to investing in the infrastructure space is that . . . many people say, ‘We’re not sure we know enough about the space’. We can provide education and information to clients,” Porter said.
The trio has previous experience launching fund of funds products. At State Street, Lyons helped launch the $240 million Wilton Private Equity Fund, which was a joint venture with DuPont Capital Management.
Other asset managers have also looked into establishing funds of funds for the infrastructure sector. Last year, InfrastructureInvestor reported that Macquarie was aiming to launch an A$1 billion fund of funds for infrastructure. It is unclear whether it is still proceeding with the fund, which was being led by Sydney-based Peter Johnston.
In Europe, Germany's Sal Oppenheim Private Equity Partners is making an initial foray into infrastructure by raising a €300 million infrastructure fund of funds.