Mark Weisdorf was an avid runner in his younger days. Growing up in Toronto, the chief investment officer of JPMorgan Asset Management’s Infrastructure Investments Group used to run cross country, long-distance track events and even marathons.
“I was never a very fast sprinter,” Weisdorf recalls. “But the longer the distance, the better I was. And I think that is something that has informed me and helped me in investing.”
Infrastructure investment, Weisdorf says, is not a sprint. It requires a patient, long-term investment horizon and the ability to deploy one’s capital with discipline, just as an athlete must conserve energy while running a marathon.
Words like “patient”, “long-term” and “disciplined”, of course, get used a lot when people talk about infrastructure. But coming from Weisdorf, who once served on the board of directors of the Canada Pension Plan Investment Board (CPPIB), the Toronto-based entity in charge of helping 17 million Canadians retire comfortably, they’re no mere platitudes.
Drawing on his experience as a pension investment officer, Weisdorf has over the last four years turned JPMorgan’s infrastructure platform into a 50-strong team. According to the latest JPMorganChase annual report, the group has over $4 billion of assets under management.
Think like a pension
Weisdorf today may be running a different race from his CPPIB days, but he’s still competing with the old pension fund manager shoes at his feet. His awareness of the long-term objectives of large institutional investors has informed the way he has built JPMorgan’s infrastructure group.
Weisdorf, who declined to discuss any details of his firm’s various investment programmes, confirms that “all of those structures and strategies are designed in conjunction with dialogue with our clients”.
Those clients include pension schemes such as the Dallas Police and Fire Pension System, which has published details of having committed more than $50 million to JPMorgan to invest in infrastructure on its behalf.
Weisdorf also declines to identify any clients, but he makes clear what they want from investing in infrastructure. “They see it more as an asset-liability matching tool”, he says, much like he did when he was in charge of private investments at CPPIB. As a pension investor, “other than in your venture capital portfolio, you’re not shooting for 20 percent plus returns. You’re really shooting for assets that nicely match your liabilities, so you can actually grow the surplus in your pension plan or reduce your deficit if you happen to have one”.
Matching one’s pension liabilities is of course easier said than done. The infrastructure assets that best accomplish this, Weisdorf says, are brownfield assets in developed economies such as OECD-member states. Often they are government-owned, so it can take a lot of time and effort to catalyse a sale, win an auction and minimise broken deal fees in the process. Small wonder, then, that unlike capital gains-driven private equity investors, pension investors in infrastructure are not in it for a quick flip.
“When you find an asset that’s a good match for your liabilities, a lot of clients don’t want to let go of that investment in five or ten years. Many investors would actually like to hold on to those assets for 20, 30, 40, and even 50 years. And so it certainly makes sense to clients, to hold those assets in a longer tenor-type strategy and structure,” Weisdorf says.
A long-term holding period, though, implies a long-term approach to just about everything else – especially fees.
“Different fee structures motivate different types of behaviour,” he says. “The traditional private equity model, call it two and twenty, expects sales of assets,” he says, referring to the standard private equity practice of charging investors two percent management fees and 20 percent carried interest, or performance-based fees. “In fact, it kind of motivates exits, because the way you actually earn the carried interest or the performance fee is by selling assets”.
For pensions investing in infrastructure, this incentive structure often misses the mark, says Weisdorf. Once again he is emphatic on this point: “If you actually find an appropriate asset for your pension plan, then you don’t want to have that sold,” he says. “The reinvestment risk is huge. So do you really want a carried-interest-type fee that actually encourages the sale of the asset? You probably don’t.”
A fee based on the value of the asset works as a better alignment of interest between investor and fund manager in infrastructure, argues Weisdorf. Unlike private equity, infrastructure assets tend to have stable and predictable cashflows. “So it’s much easier to use longer-term discounted cashflow analysis in the infrastructure space than it might be in the private equity space”, he says.
Discounted cashflow analysis, of course, is the staple of any investment manager’s net asset value (NAV). An NAV is like a barometer for manager performance. If investors see NAV increasing, it means more cashflows are accruing to them. If NAV is falling, then the reverse is the case.
“Alignment of interest implies symmetrical risk. LP does well, GP does well. LP does poorly, GP does poorly,” Weisdorf says. “Therefore, charging fees based on net asset value, which is based on discounted cashflow analysis, is a rational and sensible approach.”
Mind the strategy
While brownfield assets in developed countries tend to lend themselves to fee-on-NAV structures, says Weisdorf, so-called greenfield projects come with more private equity-style capital gains profiles. “Particularly in countries like China and India, where the need is for new infrastucture,” he says. Such new construction, or greenfield assets, have a different risk-return profile and therefore require a different investment approach.
To Weisdorf, greenfield infrastructure is akin to an opportunistic, capital gains-driven real estate strategy, in which “you build, you lease up, and when fully leased and stabilised, you sell. Maybe you can do that in five, seven, or ten years. So maybe a shorter tenor strategy for greenfield development is more appropriate, and that makes sense.”
JPMorgan can now accommodate both strategies – and execute globally. As disclosed in the annual report, JPMorgan’s Global Real Assets Group, the division within JPMorgan Asset Management where Weisdorf’s team sits, has added an Asia-focused infrastructure team. The team has about 20 people in offices across Hong Kong, Singapore and Mumbai and is headed by Hong Kong-based Philip Jackson, according to the JPMorgan Asset Management website.
What’s keeping Weisdorf busy at the moment? He declines to discuss specific transactions but, to date, about three-fourths of JPMorgan’s infrastructure investments have been focused on OECD countries and approximately one-fourth on Asia, based on a count of public disclosures such as press releases published by third-parties on transactions involving JPMorgan’s infrastructure team.
Most recently, the firm participated in the A$530 million, 99-year lease of Queensland’s Cairns Airport, according to a press release issued by the Queensland government, and an equity financing of a wind farm portfolio operated by US clean energy developer Invenergy, according to an Invenergy press release. Both transactions closed in January 2009, marking JPMorgan’s seventh and eight infrastructure investments, respectively, by Infrastructure Investor’s count.
The team has been cautious on the deal front recently, Weisdorf says. “There was some activity late last year, early this year in the midst of the storm. We’re consistent with what you see generally across the marketplace with less activity and certainly we are one of those potential buyers who are being quite disciplined and patient, waiting for owners to capitulate.”
Fortunately perhaps, owner capitulation may not be too far away. “The biggest issue as to why transactions haven’t been happening is that there’s a gap between what buyers are willing to pay and what owners are willing to sell their assets at”, Weisdorf notes. “But I think that activity is going to pick up, if not in the fourth quarter of 2009, then certainly in 2010, as expectations come together.”
The key driver behind the pick-up in activity, he believes, will be leverage. Owners of assets will have to either refinance or restructure their debt burdens. This may lead to some interesting opportunities for new investment, even as it augurs ill for the much-expected economic recovery.
“This is going to be a long, slow recovery because the financial system and economies all around the world are de-levering,” he predicts.
Still, the one-time marathon man is poised to take the challenge head-on. Aside from running, the younger Mark Weisdorf also used to be a member of his high school’s wrestling team, where his coach taught him to not use his muscles to wrestle but to use the “leverage” instead. “Not meaning debt leverage,” Weisdorf quickly cautions, eliciting laughter – but “using your body and your head instead”.
In a year marked with debt-fuelled high-profile blow-ups of infrastructure managers, the advice couldn’t ring truer.