LPs wonder if they stand to lose from ‘win-win-win’ continuation funds

As continuation vehicles become more common in infrastructure, LPs are putting such structures under the microscope.

It’s been quite a year for infrastructure continuation funds. What began in January with Stonepeak closing a $3 billion vehicle to recapitalise US data centre group Cologix was followed the next month by Global Infrastructure Partners’ continuation fund for TIL, a Switzerland-headquartered manager and developer of container ports, in another $3 billion vehicle.

Data centres were the subject of another continuation fund in June by DigitalBridge for DataBank, which has now raised $1.5 billion, while the manager is also considering another such fund for Vantage SDC. Energy Capital Partners was another group to join the club, moving US power company Calpine Corporation into a continuation vehicle, amassing $1.6 billion.

The argument for such moves from GPs has been that these assets have been delivering the sort of income that makes GPs want to continue to derive benefit from them, encouraging existing and new LPs to join them on that journey. The perpetual nature of a continuation fund has been an additional driver in the infrastructure market.

In our Deep Dive on the then nascent continuation fund space in 2019, James Wardlaw, then of Campbell Lutyens, told us such processes have to be a “win-win-win” for the GP, the LPs exiting and the LPs entering. However, as such vehicles become more common, some LPs are questioning the universal benefits of such an ideal premise.

“We certainly have concerns from a conflict perspective in terms of both alignment of the GP and the LP,” Ying Lin, vice-president of infrastructure at Stepstone, told attendees at our America Forum this month. “We certainly think that there is a place for assets that are managed long term, providing healthy yields and have a long-term story because they are very asset-heavy and returns are generated over a long term. However, we are very cautious, just to make sure that there is a third-party check or a market system in terms of evaluation at entry.”

Lin was joined by Dima Blumin, senior portfolio manager, real assets, at the World Bank Pension Plan who said he wasn’t against such moves, but was then asked why such structures make sense?

“I think if a manager would have a clean and nice exit, I still think that that would be the better option for everyone involved,” he said. “Then you move on to the next asset and you add your value onto the next asset. That would be, at least from my perspective and I cannot speak for everyone in the fund, something that you sign up for when you invest in the fund.”

With GPs telling LPs that good assets are hard to come by, other concerns were also raised on the panel as to why GPs wouldn’t just take advantage of the higher valuations in this market and seek the best price through a sale.

These, of course, are observations from LPs that are cooler and more cautious towards such structures. Evidence suggests that others are warmer to it. That being said, Infrastructure Investor understands that one manager which concluded a continuation fund in the renewables space in 2021 is now looking to offload the asset, leaving some LPs involved mystified by the whole process, not to mention the fact they dived into the continuation fund specifically because they didn’t want to sell.

A summer survey by placement agent Probitas Partners indicated that alignment between GPs and LPs was top of mind for investors and in what could be a pivotal year for infrastructure fundraising in 2023 GPs considering such vehicles would do well to keep this in mind.