When we were preparing to finalise our April issue, we had a momentary pang of horror regarding our just-published cover story. After all, a meditation on whether it still makes sense to invest in a long-term asset class through relatively short-term structures risked coming across as dangerously academic during the covid-19 outbreak.
Now that the pandemic appears to be here to stay and concern grows about the severity of the recession it will bring about – McKinsey’s worst-case scenario envisages the world economy returning to pre-crisis growth in Q3 2022, with the US and Europe needing, respectively, until Q1 and Q3 of 2023 to pull through – we actually think it might be more relevant than ever.
Infrastructure assets are already being impacted by the current crisis, with transportation at the forefront. With the asset class rightfully lauded for its long-term characteristics, its resiliency and stability, it makes sense to take another look at whether these attributes are maximised by the current private equity-like holding structures, in many ways a legacy of the asset class’s beginning.
The first and most obvious reason to do so is that some vintages might find themselves having to make difficult decisions on perfectly good assets because of timing and a need to exit. Proponents of permanent capital structures will argue that, even in good times, it wouldn’t be desirable to have to let go of flagship assets on account of fund structure. That resonates doubly at times of crisis.
A second reason is that, while buying and selling assets is par for the course in private markets, there is some evidence that, when it comes to essential infrastructure, public counter-parties are looking for stability in ownership.
“If you’re talking to a city about a local airport public-private partnership, I think it is imperative that you can commit to being their long-dated partner versus their transitory partner,” Sean Klimczak, Blackstone’s head of infrastructure, argued.
While he was not referring to it, we recalled in our story the Danish government’s adverse reaction to the divestment process of Copenhagen Airport by a 2008-vintage Macquarie fund. That was in normal times. As the coronavirus puts public-private relations through thick and thin, it is not a stretch to suggest the public sector might become even more sensitive to perceived short ownership periods.
The good news, of course, is that GPs have options when their funds are coming to an end. We wrote extensively last year about the rise of continuation structures in infrastructure. A snap poll conducted by PEI surveying 119 private equity fund managers showed that 44 percent have not ruled out a GP-led secondaries process to give portfolios more time to deliver value. There’s no reason why this would be different in infrastructure.
Continuation structures, however, are not a walk in the park. They also have costs attached. Those might bring into sharper focus the costs LPs already incur trading in and out of closed-end funds. As CBRE Global Investors’ Andreas Kottering put it to us: “If you churn a business from one manager to another and then another, at each stage there is an entry and an exit cost. These costs are perhaps higher than people are prepared to admit.”
LPs looking at their portfolios, and identifying assets they have owned through what will now have been two global recessions and multiple periods of GP ownership, might find themselves wishing those assets had stayed put in the same fund all along.
“The story behind the infrastructure asset class has always been you can access long-term and stable cashflows,” Meridiam’s Thierry Deau pointed out to us. “The reality is if you churn [assets] every five to 10 years, they’re not long-term and they’re not stable.”
Ultimately, it’s for LPs to decide what role infrastructure should play in their portfolios. But as uncertainty strikes once again, it is fair to ask whether the status quo is still fit for purpose in the 2020s.
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