LPs still like infrastructure, despite slowdown

Fund placement agents active in the asset class say LPs are likely to stick with infrastructure despite the economic downturn and may even up their commitments as a result of it.

Fund placement agents interviewed by InfrastructureInvestor say that the slowdown in fundraising that started in the fourth quarter of 2008 is not as severe in infrastructure as it is in other asset classes.

Professionals at three US-based placement agents – Probitas Partners, CP Eaton Partners and Champlain Advisors – also revealed that LPs may be looking more to the infrastructure and energy going forward as a way to weather the economic downturn.

“If you look at the underlying trends in surveys and in conversation with investors, forecasting 2009, I think there is still a lot of interest in infrastructure”, said Kelly DePonte, a partner at San Francisco-based Probitas.

In an October 2008 investor survey conducted by Probitas, 28 percent of respondents indicated that their appetites for the asset class would increase, 35 percent said it would remain the same and 27 said that they would continue to be opportunistic about investing in infrastructure.

Despite these sentiments, only about $3 billion was raised by infrastructure funds globally in the last quarter of 2008 as LPs generally paused making commitments to reevaluate their portfolios after unprecedented drops in public equity markets.

“Many investors are trying to figure out where they are bleeding the most as of year end 2008,” said Terence Crikelair of Champlain Advisors, a Connecticut-based placement agent active in the energy sector.

DePonte cited concerns among LPs about investors unsuccessfully copying the “Macquarie model” of highly leveraging existing infrastructure assets to derive higher returns for investors.

“But investors understand that not everyone in the infrastructure space was following the Macquarie model, so there is still a fair amount of interest for infrastructure in 2009,” he added.

Others paused due to deeper skepticism about the ability of the asset class to deliver on its promises.

“Generally, the trend I saw in the market is that LPs have seen a lot of funds raised and haven’t seen as many deals spring up, so some have slowed their commitments to infrastructure,” said Brian Newman of CP Eaton Partners, a placement agent active in real asset strategies like infrastructure.

“There haven’t been a lot of realisations and a lot of LPs are waiting to see if the model really works and what those realisations might be,” added Jeffrey Eaton, also of CP Eaton. “I think at the same time they still believe in the positives of an infrastructure deal and maybe they have just shifted their attention to other [real asset] areas like energy and power.”

Energy has been a fundraising bright spot in the US market. Energy funds continued to see commitments trickle in throughout the fourth quarter, with Texas-based Quintana Capital, Quantum Energy and Kayne Anderson, among others, making progress toward commitments totalling $250 million, $2 billion and $700 million, respectively.

Crikelair, who is Quantum's placement agent, attributes it to the collapse of energy prices in the second half of 2008 and the anti-inflationary impact it offers investor portfolios going forward.

Energy aside, LPs that are cutting back generally across all alternative investments are cutting back less to real assets like infrastructure. Newman credits this to the asset class’ characteristics.

“Infrastructure funds generally produce inflation-hedged current yield, downside protection, and uncorrelated returns.  Each of these characteristics became more valuable in the second half of 2008 when LPs saw the public markets hit hard and private equity distributions dry up at the same time,” he said.

Newman believes that investors understand these characteristics much better than they used to – a factor that may help fundraising for the asset class pick up strength again soon.