It’s been a very hectic week on the infrastructure fundraising front with plenty of seemingly contradictory messages coming in from the trenches.
On the one hand, we’ve been reporting about the demise of several high-profile names – Hadrian’s Wall on the debt side; CVC on the equity front. On the other, we’ve been telling you that H1 fundraising is up by a whopping 88 percent compared to the same period last year, and that Brookfield’s sophomore effort has just amassed $6.23 billion.
What’s going on here, exactly?
Let’s remove Hadrian’s Wall from the equation – a fairly unique proposition that deserves a separate analysis – and focus instead on CVC’s maiden infrastructure vehicle. In the market since 2009, CVC was selling a European-focused, closed-ended equity fund originally targeting €2 billion.
It managed to clinch a first close on circa €200 million last summer from a core of three investors, and had secured a further €100 million in soft commitments. Then this week, it surfaced that CVC was abandoning its infrastructure fund to focus instead on tailored “managed investment arrangements”.
Sources say that for the fund to make sense it would have needed to achieve a certain scale, and CVC was not managing to attract a sufficient number of investors to get to that scale. Besides, the type of large investor it was targeting was not really interested in blind pool funds anymore, preferring bespoke solutions instead.
This last argument has a certain ring to it. Managed arrangements, managed accounts, and tailored solutions are certainly the flavour of the day – and a clear manifestation of the ongoing power shift from general partners (GPs) to limited partners (LPs).
This lends a touch of pragmatism to CVC’s decision. After all, it already has some €300 million lined up: if what it takes to keep it is a different strategy, then it’s probably better to be flexible and keep the money than be inflexible and out of pocket (and maybe out of business).
More interesting though is to probe why LPs would go for this type of managed solution. We don’t know what CVC has lined up, but your average managed account gives LPs two things: lower fees and veto power on investment decisions (whereas in most funds, once you sign up to their general principles, you have to put up with whatever is decided).
It’s easy to see the appeal of paying fewer fees. But are LPs that still need to partner with GPs sufficiently knowledgeable about the asset class to make meaningful use of a veto? Anecdotal evidence suggests that LPs that are confident enough tend to skip GPs altogether and go direct. Or alternatively do co-investment as part of a blind pool arrangement, leveraging the best of both worlds.
With a managed account, LPs are still effectively relying on GPs to invest their money – they just have more control over the process and fewer costs. As for GPs, managed arrangements still allow them to, effectively, be in the business of managing other people’s money.
Importantly, what managed arrangements also allow is for both sides to manage expectations. And that, in the shifting quick sands of GP/LP power politics, is more priceless than it at first seems.