Infra funds seeking ways to attract LPs with low risk appetitte

Private equity firms that invest in infrastructure have work to do to balance the desires of institutions like pensions for low risk and steady cash flows with their own goals of collecting carry and exiting investments, speakers said at the Global Private Equity Conference in Washington DC.

Private equity infrastructure funds are facing the challenge of convincing potential limited partners looking for low risk and long hold periods that a private equity model can indeed work in the asset class.

“The mentality of the GP is that they want to generate carry, hold the deal for five years and get rid of it,” said MK Sinha, president and chief executive officer of IDFC Project Equity Company. “LPs are thinking of holding for 15 years.”

Without the LPs you have no business, so try to do what is best for them, put their requirements first

Sipho Makhubela

Sinha was a member of an infrastructure panel at the 12th annual Global Private Equity Conference Tuesday. The conference is held each year in Washington DC and is hosted by the International Finance Corporation and the Emerging Markets Private Equity Association.

The infrastructure panel discussed the challenges of attracting LPs to the asset class. One idea discussed by panelists was for private equity infrastructure funds to manage investments during their development phases, when risk is higher, and eventually exit to LPs looking for stable projects and consistent cash flows.

“Private equity firms are perfectly fitted to come into projects at the development stage and help enable the assets, see them through construction and once operating, that's when private equity can get out, get higher returns and put it in the hands of the next investors who want low risk investments for the next 20 or 30 years,” said Victor Munoz, managing director at Denham Capital, also a member of the panel.

The private equity infrastructure model is “still evolving”, Sinha said.

Sinha said the asset class “experimented” with listed funds, which is a model that has some “flaws”. He elaborated: “Annuity investors can stay invested in the fund, and the [private equity] guys can exit,” he said. “There are flaws there.”

Another idea is to “bundle” together assets that are generating consistent cash flows and sell them to investors looking for annuity-type investments, Sinha said.

These kinds of bundled assets could produce returns in the “early double digits”, Sinha added.

“The right model is [somewhere in between] the listed perpetual entity and a private equity model. The model will evolve over time,” Sinha concluded.

It is also vitally important that GPs make sure they are “aligned” with the interests of their LPs, said Sipho Makhubela, investment director at Harith Fund Managers.

“It's a tricky situation. At the core of it, [it] is very important to ensure you are aligned as much as you can,” Makhubela said. “Without the LPs you have no business, so try and do what is best for them, put their requirements first.”