Live long and prosper

Participants at this week’s Infrastructure Investor: New York forum argued both for and against the use of permanent-capital vehicles to own infrastructure assets. Both views are right.

In contemplating infrastructure investing, two conflicting truths emerge. The first is that infrastructure assets (should) perform consistently over the long term. The second is that human beings have a hard time predicting the near future, and a very hard time predicting the “long-term” fate of just about anything.

Highlighting this latter point, Marc Lipschultz, head of energy and infrastructure for Kohlberg Kravis Roberts, asked the audience of roughly 150 people gathered at Infrastructure Investor: New York to imagine themselves being asked in 1969 to plot a future course for the US energy industry and place a long-term bet accordingly.

Almost any long-term investment would at some point in the turbulent years to follow have careened off course, whether during industry disaggregation, regulation or at the advent of the green movement. An open-ended fund with the goal of perpetual ownership of assets would not be well suited to the changing times, he said.

“We have to cast our minds about what the limits of human imagination are,” Lipschultz said, adding that a shorter investment horizon can encourage discipline in infrastructure investment and make it easier for investors to evaluate manager performance.

A delegate to the event who happens to operate an open-ended fund took a somewhat different view. Yes, things change, he said during a networking break. Not only does the performance of the underlying assets change, but the needs and goals of the investors change over the decades. All the more reason, he said, to have a structure that facilitates liquidity and the changing of ownership. At any given point in the life of an infrastructure asset, one investor’s view of the asset at exit may perfectly match another investor’s view of a good entry point.

The exchange is part of an ongoing and broader conversation across the infrastructure asset class, which is a long way from arriving at anything resembling “market” terms and conditions for the partnerships that seek to invest in and improve infrastructure. It is an asset class in the midst of being born.

One thing that all delegates and panelists at Infrastructure Investor: New York agreed on – they believe themselves to be part of something that is going to grow tremendously over the long term. Ed Rendell, the governor of Pennsylvania and a speaker at the event, declared that private investment in infrastructure would be needed to fill a “void created by political cowardice”.

Lipschultz gave the audience a sense of the size of the future market for private investment in infrastructure: “I think we are facing an opportunity set that is large, long and attractive.”

The debate over open-ended vs. closed ended funds may ultimately be one of packaging, which changes based on the tastes of the investor. If Rendell and Lipschultz are right, there will be many investor packages delivered in the decades to come.