For anyone wishing to spark lively debate among infrastructure fund managers, there’s no better question to ask than, “What’s the best way to own infrastructure assets?”
The debate is rooted in the nature of the asset class itself. Unlike traditional private equity targets, infrastructure assets tend to attract long-term investors who wish to buy and hold rather than make a quick exit.
One ownership structure that addresses this concern is the open ended fund, which commits investors to a shorter lock-up and allows them greater freedom to redeem their interest or to continue to commit more capital, depending on how satisfied they are with the fund management.
These kinds of funds are just now making their way to the US, where JPMorgan’s much-envied evergreen fund (led by Mark Weisdorf) and Industry Funds Management’s International Infrastructure Fund are so far the only two big open ended funds visible in the marketplace.
Their key attraction, proponents argue, is that they align the tenor of the asset with the tenor of their fund and, in so doing, align interests as well.
But they’re not the only alternative.
Speaking in New York last week at PEI Media’s Infrastructure Investor forum, 3i Infrastructure chief Michael Queen opted overwhelmingly for the listed fund approach.
“With a listed fund you can confidently say that you’re going to hold an asset for 20 to 25 years,” Queen said, noting that listed vehicles, while albeit less tax efficient that their unlisted counterparts, create less of a pressure for liquidity events or forced sales.
Others at the forum disagreed, arguing that the listed model as it stands is dead. For many such funds, choosing to pay dividends out of debt rather than existing cash flows led to overleveraging and, eventually, forced selling, which has dampened investor confidence in listed vehicles across the board.
Case in point: Australian Stock Exchange-listed BrisConnections promised to pay investors distributions of 5.95 cents per unit on a toll road from Brisbane’s city centre to the airport that has yet to be built. It is currently trading at less than one penny per share.
Pooling assets into a private equity-style fund alleviates some of these problems, but in turn creates another: investors end up owning an asset with a tenor of 50 years, 75 years or even longer in a fund with a ten- or fifteen-year lifespan.
At the end of the fund life, assets have to be sold, generating transaction, legal and advisory fees that ultimately come out of investors’ pockets. A long-term pension investor who wants to continue to get distributions from the asset might say: why have me pay for a sale if I’d be happy to continue to own the asset?
The solution, some argue, is to pool infrastructure assets into open ended funds instead.
But the structure is not without its drawbacks. Some GPs express concern that by forcing investors to redeem their investment by selling their stakes in the fund rather than by having the GP liquidate the hard underlying assets, open ended funds may be short-changing their LPs.
“If the market [for the stake] isn’t deep enough or liquid enough, you effectively don’t get full value on your investment,” remarked one GP who is considering starting an infrastructure fund but is torn between whether to utilise an open ended or closed ended structure.
It is a decision that many GPs will struggle with as this asset class balloons in capital under management.