Do infra GPs plus M&A equal concentration risk?

Third-party investors buying GP stakes is a fairly new phenomenon in infrastructure, and it is picking up steam. But what does it mean for LPs and competition?

When we published our 2021 full-year fundraising report a few weeks ago, we noted that the trend we’ve already been seeing for several years now – fewer funds raising ever-growing piles of capital – is going strong, giving a clear indication of continued consolidation in the industry.

But the consolidation is not just occurring on the fundraising level. On 24 January, investment management firm Colliers announced it would be acquiring a 75 percent stake in mid-market manager Basalt Infrastructure Partners. The following day, AssetCo, a UK-based company initially established to provide fire services to Gulf states and acquired by Martin Gilbert, founder and former chief executive of Aberdeen Asset Management (now abrdn) agreed to buy River and Mercantile, a London-based asset manager and advisory firm, which last year had hired an infrastructure team away from Aviva Investors.

“It is intended that RMG’s new sustainable infrastructure investment strategy will form the first, and very important, building block in the Combined Group’s private markets capabilities,” AssetCo said in a London Stock Exchange filing.

These are not the first nor the only such transactions, but they are an indication of a growing trend; think Patrizia acquiring Whitehelm Capital last September, or Nuveen, the investment manager of the Teachers Insurance and Annuity Association of America (TIAA) acquiring renewables fund specialist Glennmont Partners in January 2021.

While the first three examples mentioned here were more about non-infra GPs acquiring infrastructure fund managers to expand into the asset class, Nuveen’s acquisition of Glennmont was more about meeting the “increasing global demand for environmentally responsible investments that also aim to provide alternative sources of attractive returns”, according to a statement Nuveen issued at the time.

It is that global demand for ESG investments, which includes renewables and anything related to the energy transition, that will drive more M&A activity among GPs, an industry insider told us recently, who believes energy transition will become an asset class in its own right within the next five to eight years.

Large-cap infrastructure players may not yet have acquired mid-market or specialist firms, “but it’s going to happen. They are looking,” this person said.

Digital infrastructure, which has also become the second-most popular sub-sector in the past two years, is less likely to drive similar M&A activity, in our view, for two main reasons. The first is that there are far fewer specialist GPs dedicated to the space; second, many generalist GPs have already established digital infra portfolios and in-house teams.

Regardless of the type of GPs being acquired, the increased M&A activity seen so far and expected down the road raises the following questions: what does this mean in terms of competition? What does it mean for LPs?

According to our source, it doesn’t necessarily translate into bad news.

“The real question is, ‘What happens with the GP’s governance and independence after such a majority sale?’,” our source countered.

If that independence can be guaranteed, if the “fundamental carry-based alignment with the LPs” can be maintained, and if the acquisition doesn’t trigger a loss of talent, then there should be no negative impact on LPs or on the market in general.

“What people don’t want to see is the GP taking the money and walking away,” the source said. “But that’s why these deals aren’t structured like that.”

We don’t necessarily disagree with the above assessment but despite whatever guarantees are put in place to ensure an acquired GP’s independence, we can’t help but feel a bit sceptical that this M&A activity is indeed leading to fewer choices for LPs. At the very least, the acquisition of a specialist or mid-market manager means one fewer independent firm out there. For an industry that values diversification, this trend doesn’t seem to encourage that, at least not manager diversification.