Greenfield myths

Infracapital just closed its debut greenfield fund on £1.25bn. That it took two years to raise and one investor felt compelled to remove it from its infra bucket shows there’s still work to be done

It’s one of the catchiest titbits from our p. 14 Infracapital keynote interview: an LP in the firm’s greenfield fund recounting how it decided to exclude the vehicle from its infrastructure bucket, instead classifying it under a new pool containing “more out-of-the-ordinary assets”.

That vehicle has recently hit its £1.25 billion ($1.6 billion; €1.3 billion) hard-cap so it was clearly a success. But the above LP comment, together with the fact that it took two years to raise at a time when half of the brownfield funds closed in the third quarter spent less than 18 months on the road, according to Infrastructure Investor data, shows we’ve still got a way to go.

To get to the point, it seems there’s still a fair number of LPs out there overly concerned about greenfield strategies’ supposed higher risks and not appreciative enough of the advantages they offer. Particularly in 2017, when one could easily argue the risk-return profile of many a brownfield strategy is, frankly, out of sync with the prices being paid in certain sectors and markets.

That’s not to say investor perception about greenfield risks has remained completely static. A recent survey of 186 investors by the Global Infrastructure Hub and EDHECinfrastructure showed that respondents were not demanding a risk premium for greenfield investments.

The report attributed this to protection given to equity investors during construction and post-construction phases. “We’ve always felt that the perception of construction risk has been slightly out of kilter in terms of what it should be,” Infracapital co-founder Ed Clarke pointed out. He’s right: construction risk was the bogeyman of greenfield strategies for far too long, when, in fact, it’s a very manageable risk.

If you want to worry about greenfield risks, worry about the pre-construction phase, but even that should be put in perspective. As Andrew Claerhout, head of infrastructure and natural resources at the Ontario Teachers’ Pension Plan, an active greenfield investor, told us in June:

“If you look at risk on a greenfield project, it’s very high at the beginning, but the capital against it is very low. And then as the risk comes down, the capital goes up, ironically. When you get to the building stage and it’s time to write a large cheque, the risk is actually much lower than when you’re spending $5 million developing a project. And that’s how we got comfortable with it. We wouldn’t be betting the farm – these are controlled experiments.”

Of course, Claerhout is speaking from the perspective of a semi-direct investor, executing on greenfield projects through select partnerships. But managing that pre-construction risk is partly a function of managing your partner’s or fund manager’s track record of executing on those projects. The other half of the equation is whether the projects themselves – and those procuring them – are solid and exist in sufficient numbers. “We couldn’t have done it five years ago because we wouldn’t have had the confidence that the pipeline was there,” co-founder Martin Lennon commented, referring to Infracapital’s greenfield fund.

Those are legitimate concerns that should be factored in. We’re also not denying that certain greenfield strategies can be higher-risk than brownfield ones. But these risks can be managed, are certainly infrastructure risks and shouldn’t obscure the advantages these strategies offer. For investors, they include diversification, the ability to secure future assets by buying into them early on, and, of course, the crunchy returns that can come from selling those soon-to-be brownfield assets to a market ravenous to acquire them.

Those rewards are certainly worth dusting off old misconceptions for.