Buoyant market conditions are making it challenging for LPs to truly assess how much value GPs are adding to investments, the Infrastructure Investor Hong Kong Summit has heard.
Jake Lee, head of infrastructure at Hyundai Marine & Fire Insurance, said: “A lot of GPs have a really good track record. The question I always ask GPs with a great track record, especially on the debt side is: is this because of your ability or because you’re lucky?
“It’s really hard for us to differentiate lucky managers from good managers so we’re trying to dig into managers’ numbers. When the market goes south, we’ll see the real value and skills that GPs have – in the current market environment it’s very difficult to differentiate.”
Dennis Chan, managing director and head of infrastructure at China Ping An Insurance Overseas (Holdings) Limited, echoed this, saying that most GPs they encounter “do generally very well”.
He said that one method they use to assess managers alongside looking at target returns and general track record is to examine if they have good “early-stage” investments.
“Some GPs made tower and small cell investments three to four years ago – initially returns were not good but now they are. That’s a sign they’re ahead of the sector. One can also look at not just historical records but current funds and what multiple they paid for assets,” he said.
Lee added that a concern for Hyundai was the fact that the infrastructure asset class has only existed long enough to see one downturn, during the global financial crisis that began in 2008, with many newer funds and managers only operating in a growing economy.
“The industry doesn’t have a 20- to 30-year history in terms of GPs. We don’t see funds numbered 7, 8 or 10 as we see in the private equity industry. We don’t really know how infrastructure GPs will behave in a downturn scenario like the GFC in 2008. There will be another GFC at some point – how infrastructure GPs behave in a financial crisis, or just a downturn, will be really interesting,” he said.
Nicole Connolly, founder and managing director of fund of funds Infrastructure Partners Investment Fund, commented that three of the Australian funds it invests in have track records going back 25 years – but said she expects returns to be compressed in future.
“Our expectation is that returns will be lower going forward because of asset values and purchase multiples being paid now. We’re investing in open-ended funds that have been built up over 25 years, so our managers aren’t highly acquisitive. They can step back and not buy assets if they think the market’s a bit toppy,” she said.
Lee added that it was “critical” to have local representation in the country where a manager is wanting to expand LP commitments, like South Korea.
“The GP-LP relationship is like a marriage – you commit to each other and then there’s no way back. Once you establish a relationship, you have to keep it reliable. You’ll know GPs better after you make investments [with them] – you’ll see how they keep their promises.”