For those infrastructure general partners (GPs) offering longer fund lives, one of the difficulties they face is the ability to provide team members with appropriate incentivisation – an issue that has been taxing the minds of many a legal adviser working in the infrastructure space recently.
“There has been a lot of work to bring forward the incentive payment dates,” says Jonathan Kandel, a partner in the private funds group in the London office of law firm Weil.
But making sure team members get compensated within a reasonable timeframe is only one aspect of the challenge. Another is trying to work out an appropriate formula for the basis upon which payment is due.
As Kandel says: “With long-dated and evergreen funds, managers are not looking to be incentivised to sell assets: they are looking to be rewarded for generating long-term substainable yield.”
“You need to incentivise based on an income return, rather than selling assets. And that’s where it gets complex. Making it work for the GP is hard but by no means impossible.”
“Another key to GP economics is scale,” Kandel continues, “as the management fee [as a percentage] will not be as high as it is in pure private equity. But if you have scale, and the assets throw off yield, then there are mechanisms by which you can share in the excess yield over a given benchmark.”
He concludes: “There are a lot of nuances and it’s something we spend a lot of time on because you need the team to stay put and be rewarded over the long term.”
For a full analysis of all the topical issues in infrastructure fund structuring and modelling, please click here for our cover story in the February 2013 issue of Infrastructure Investor.