There’s nary a week goes by without infrastructure falling under the spotlight of one media organisation or other.
Last week was a case in point. On Friday, the Financial Times took yet another pot-shot at the asset class in an article entitled Infra funds can no longer play the arbitrage game, which, as one reader wryly pointed out, sounded “like a critique of the Macquarie model circa 2007”. Earlier in the week, the latest issue of Pensions & Investments landed on our desk, with a lavish spread on infrastructure, covering everything from the increased appetite among Asian and North American LPs to a growing movement towards direct investing by European institutions.
Funnily enough, the challenges and opportunities of investing directly in the asset class are the focus of our soon-to-be-published Deep Dive, which is set to go live next week. Ahead of its publication, here are three takeaways for those contemplating such a move.
You can save on fees…
Carsten Grohn, head of private capital and real assets at the DKK 140 billion ($21 billion; €19 billion) PenSam, had this to say to P&I about its partnership with AIP Management, which the Danish pension fund established in December to increase its direct investment footprint: “Partnering with AIP enables us to pursue direct opportunities at a lower cost compared to an infrastructure fund.” This is a common driver for direct investing in infrastructure.
Nik Kemp, head of infrastructure for the A$145 billion ($100.7 billion; €89.7 billion) AustralianSuper, told us the superannuation fund’s management expense ratio fell from more than 70 basis points at the time of the fund’s first direct infrastructure investment in New South Wales Ports, in 2013, to 43 basis points five years later.
…but these programmes are not cost-free
“I don’t think you can go a little into direct,” says Emmanuel Jaclot, who leads the infrastructure group at the C$309.5 billion ($231.8 billion; €206.9 billion) Caisse de dépôt et placement du Québec. “You either commit to it by hiring a strong team and building your portfolio, or you grow the strategy that is easiest: investing in funds.”
There are several costs to hiring the sort of team Jaclot is alluding to. Some are obvious, such as the need to pay competitive salaries. Others, such as the political cost of paying such competitive salaries in certain jurisdictions, are more nuanced.
The US is a good example of the latter. You have only to look at what the $357.7 billion California Public Employees’ Retirement System is trying to do with its arms-length Pillars III and IV private equity companies to see how contentious going direct can be. Bill Slaton, the former chairman of the pension’s investment committee, describes the establishment of the two companies as a “California version of a direct model”.
Co-investment might be the better option
If for whatever reason you can’t go all in, then co-investment, the in-between step, might be a better bet.
“I don’t think we’re at a place right now where we’ve got the resources to take that step from co-investment to direct,” says Marcus Frampton, chief investment officer of the $65.3 billion Alaska Permanent Fund Corporation. “Anyone thinking about that should be pretty thoughtful about how different a world it is not co-investing with a sponsor.”
That view is shared by Paul Shantic, director of the Inflation Sensitive portfolio at the $226.1 billion California State Teachers’ Retirement System. “We have a relatively small staff and don’t have the ability to take on management of assets directly,” he says. As a result, CalSTRS is ramping up its exposure to co-investments and separate accounts.
Shantic adds: “You find out what you can do and then try to do that.” Wise words indeed.
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We are seeking your help to ensure the ranking is as accurate as possible. To be considered, please email Yvonne Hu, Research Associate, at email@example.com. The deadline for submissions is 15 July 2019.