Perspectives: Co-investment in the covid era

Although a third of infrastructure investors expect to make co-investments over the 12-month period to September, it remains significantly less prevalent in infrastructure than in other private markets asset classes. That is expected to change, however, as the industry matures.

“We see growing appetite and increasing investor sophistication,” says Vittorio Lacagnina, head of business development for private infrastructure at Partners Group. “Infrastructure is now where private equity was around a decade ago in terms of portfolio allocation. We see LPs’ growing appetite in the sector complemented by an increasing desire to co-invest alongside their stable of managers.” He adds that LPs also see co-investment as a means to establish new manager relationships by lowering their overall investment costs.

LPs are becoming increasingly nuanced in their allocation strategies, and co-investment is the ideal way to manage exposures. “Building our own portfolio of direct assets has always been one of the main targets of our parent Munich RE Group,” says MEAG’s head of private equity and infrastructure, Frank Amberg. “We believe it allows us to better target our sectors of focus with like-minded partners, and to get access to significant governance rights to align our investments with our goals.”

Tavneet Bakshi, a partner at FIRSTavenue, adds: “When looking to secure capital from large, sophisticated LPs, the ability to offer significant amounts of co-investment on an ongoing basis, at commercially sensible terms, is key.”

Execution challenges

The appetite for co-investment is not always matched by the ability to transact. LPs cited resourcing issues as the biggest inhibitor to co-investment. The need to act at speed was also mentioned as a significant challenge.

“Some investors rely on advisors and gatekeepers for their co-investment programme,” says Sandra Lowe, InfraRed Capital Partners’ head of investor relations. “This adds a layer of fees and can make co-investment programmes in core projects more difficult.”

Allard Ruijs, head of investor relations and business development at DIF Capital Partners, agrees: “Nearly all our investors are asking for co-investment exposure, but not everyone is ready to deliver on that yet. There’s no doubt, however, that experience and sophistication is growing all the time.”

Meanwhile, there are concerns the performance of co-investments made to date may be mixed. “Co-investment has been growing steadily since the financial crisis,” says Threadmark’s co-founder, Bruce Chapman. “But a lot of that, pre-covid, had been directed towards the conventional energy and transport sectors, which are obviously experiencing the most difficulties now.

“Furthermore, co-investment tends to be used for the largest transactions, and those are often the most highly priced and the most highly levered. If there are problems in LPs’ portfolios coming through this period, I suspect one of the areas of challenge will be co-investments made in those segments at the wrong point in the cycle.”

But will pain in the transport and energy industries be enough to put LPs off infrastructure co-investment? Bakshi doesn’t think so. “Investors need to put a scalable amount of capital to work,” she says. “And as investors grow in sophistication, they will increasingly want to gain access to direct dealflow. There may be a shift in sectors, but I don’t think fallout from the pandemic will scare investors off co-investment altogether.”