About a year ago, following CalPERS’ announcement that it would seek to redress its under-allocation to infrastructure via separate accounts, we wrote an editorial highlighting that, while blind pool funds were not going anywhere anytime soon, LPs were going to continue to push for new ways to access infrastructure as directly – and as cheaply – as possible.
Not long after, Ed Krapels, chief executive of US-based transmission company Anbaric, got back to us suggesting that platform companies could help quench LPs’ direct investment thirst, while at the same time helping new projects get built. “For developers, funds are a means of access to capital, but it comes at a cost. Naturally, the question arises, why shouldn’t the developer and the LPs deal with each other directly?” Krapels asked.
We don’t know if Mainstream Renewable Power actually read our exchange with Krapels, but it was clearly thinking along the same lines. After years of partnering with third parties to access institutional capital – most notably with emerging markets private equity firm Actis – the Irish firm established a new unit earlier this month, headed by Goldman Sachs and Morgan Stanley veteran James McGinnis, to source institutional equity directly.
We could see Mainstream testing the waters last August, when an IFC filing showed the developer looking for $240 million from investors to help capitalise its shareholding in pan-African clean energy platform Lekela Power, one of its recent joint ventures with Actis. That initiative came to fruition this summer, when it raised over $117 million from the likes of the Rockefeller Brothers Fund. It now has plans for a suite of products “all along the risk spectrum”, as McGinnis put it to us.
So what, I hear you ask? This is not the first time a developer is courting institutional investors directly. What’s the big deal?
The big deal with Mainstream, we’d argue, is that it’s actually in a better position to succeed than most, for three good reasons: firstly, thanks to its long years of partnering with Actis, from whom it almost certainly picked up a thing or two about building a fiduciary asset management platform; secondly, because Mainstream is already a known quantity for a significant number of investors, thanks again partly to its Actis partnerships; and thirdly, because it operates in the booming clean energy market, which, as BlackRock head of real assets Jim Barry said in our March keynote, “makes up perhaps as much as 30 or 40 percent of the low-risk end” of the infrastructure market.
And then there’s investors’ staggering dissatisfaction with the product they use the most: the closed-ended infrastructure fund. In a summer survey released by think-tank EDHECInfra, 82 percent of respondents, representing some $8 trillion of assets under management, said that “traditional closed-ended private infrastructure equity funds with fund-level leverage” were outdated and did not add value. Yet 65 percent of those surveyed are still looking to invest more in infrastructure over the next three to five years.
You can perhaps argue that some of this dissatisfaction is starting to creep into fundraising. Our in-house Q3 research shows a 7 percent decrease in capital raised by unlisted funds and a 52 percent drop in number of funds from the same period in 2015. It also shows tremendous polarisation, with successful managers like Brookfield raising record amounts of capital and others not so much.
All of this is arguably creating a gap for new players – like Mainstream – to come into the market and exploit. The question now is how GPs will continue to react to this growing investor unhappiness. Because at the end of the day, a monopoly position only goes so far in the face of consumer dissatisfaction.
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