Standing up to the storm

As has been widely reported, not many infrastructure funds were raised once the financial and economic crisis began to take effect. But there were some brave souls who saw conditions worsening and ploughed ahead.

Infrastructure Investor recently caught up with three such firms and asked them to recall their experiences.  Why did they keep going? What unexpected situations arose? And what advice would they have for others finding themselves in a similar situation? Read on to find the answers.      

No compromise

Alterna Capital Partners reached $428m for its debut fund without changing its fund structure or carried interest provisions

Firm: Alterna Capital Partners
Fund: Alterna Core Capital Asset Fund
Date closed: November 2009
Amount raised: $428 million

As the founding partners of Wilton, Connecticut-based Alterna Capital Partners like to say: “When it’s easy to raise money, it’s hard to find good investments. When it’s easy to find good investments, it’s hard to raise money.”

This certainly proved to be the case over the last two years, as the firm went about raising its debut fund to invest in what it calls “core capital assets”. These are the essential, physical assets that fuel the businesses of companies in the transportation, industrial and energy sectors. Examples include rail, ships and barges, ports and transportation facilities.

When Jim Furnivall and co-managing partners, Citi veterans Roger Miller, Eric Press, Harry Toll and Richard Bertkau, first hit the fundraising trail in early 2008, things looked good. “We had what we thought was a very warm reception by a good percentage of the people we were talking to during the first half of 2008 and it looked like we were going to be in a position to have our first closing by late third quarter, early fourth quarter of 2008,” he recalls.

The reason for the positive vibe was simply that valuations for the core capital assets they were looking to invest in were good and only getting better as a result of the recession.

But the recession cut both ways: as bargains for core capital assets increased, institutional investors’ ability to commit capital to private equity-style funds decreased – as Alterna discovered first hand when it identified a big state pension as a cornerstone investor.

“We were scheduled to go in front of the board of our cornerstone investor and a week before that meeting they called us up and said that they were having a change in strategy and they wanted to pursue things along a different line than [the] traditional private equity-structured fund that we had,” Furnivall recalls.

The pension suggested Alterna restructure its fund to make it more amenable to its investment committee. Furnivall declined to provide details, but says “we were less than enthusiastic about their suggestion”.

Alterna’s founding partners huddled together and decided to take their strategy to other potential investors. By that time, Lehman Brothers had collapsed, the government had rescued AIG from bankruptcy and the markets for alternative investments as a whole – be it real estate, private equity or infrastructure – were virtually frozen.

Nevertheless, in November 2008 Alterna went to another potential limited partner which had shown interest in the firm’s strategy and pressed ahead with discussions regarding a large commitment. In February 2009, those discussions culminated in a first close on around $200 million.

There was a catch: “The big LP in our first closing had a very strong view that they only wanted us to be out continuing to raise capital for an additional six months,” says Furnivall. They had originally been hoping for 12 months – an amount of time which could have allowed them to hit their initial $1 billion target.

“Their analysis of the situation was there’s a great opportunity, and let’s not spend all our time raising capital, let’s spend some time starting to deploy that capital in this attractive environment,” he adds.

So Alterna agreed and cut its remaining timeline to six months. “At the six-month time, they were good enough to let us finish up and things dragged on till November,” says Furnivall, at which time the firm reached a final close on $428 million.

It may not be $1 billion. But without selling an interest in the management company, compromising on carried interest and fees or making any other uncomfortable compromises, Furnivall and his colleagues were able to get to a number that they say will be enough to make solid investments in core capital assets.

“$400 million today may not buy quite as much as a billion dollars did in January 2008,” says Furnivall, “but it’s pretty close, given the way prices have adjusted in our sectors.”

A problem of definition

Actis had to overcome investor confusion about which pot commitments should be coming from – but persevered to good effect  

Firm: Actis
Fund: Actis Infrastructure 2
Date closed: October 2009
Amount raised: $750 million

Adiba Ighodaro, a senior director at Actis who had responsibility for raising the emerging markets specialist’s second infrastructure fund, pulls no punches when asked to describe the backdrop she had to work against: “The fundraising was through 2008 and 2009, and that was absolutely the worst period. It was bad all the way through.”

The fund eventually gathered some $750 million of investor capital – making it a big fish in a capital pool that had almost dried up. The firm declines to comment on what the target amount was, although it was widely reported to have been around $1.25 billion.

The launch of the fund was hardly auspicious. In order to avoid overlap, the infrastructure vehicle had to wait until the firm’s third emerging markets private equity fund had closed – which pitched the former into the market just as the financial crisis was gathering momentum.

It took a turn for the worse when anchor investor CDC Capital Partners, the UK government fund of funds manager, was forced to reduce its intended commitment by $250 million – reportedly due to other priorities and funding commitments forced upon it by the crisis.

At least these were conventional problems. Actis was also hit by the unexpected, as hinted at by senior partner Paul Fletcher, when he subsequently described the infrastructure fundraising label as unhelpful. “It’s very much a private equity type strategy in emerging markets power infrastructure, but because it was ‘infrastructure’ we ended up straddling both allocations,” says Ighodaro.

She elaborates: “It was curious because the infrastructure teams [within LP groups] would look at the fund and understand it from an industry and sector perspective but would say they needed to get 10 percent from infrastructure returns so it fitted between private equity and fixed income on a risk/return basis. From their point of view, we were juicing the returns up too much. And the private equity teams were intrigued by it and said ‘yes, there’s downside protection, but the returns are not at the top end of what you’d get in private equity.”

Asked what advice she would have for those contemplating a similar set of circumstances at the outset of a fundraising, Ighodaro says: “If you can, do what you can to avoid fundraising in such an awful market. Some investors advised their GPs to use co-investments and generally find ways of eking out capital to avoid fundraising.

“But if you have to go out fundraising, stay on top of market sentiment and have realistic expectations. It’s very tempting towards the end of the fundraising to extend it further. But there’s often not a huge need to do that. You just need to ensure you have enough capital to execute your strategy and then come back slightly earlier next time.”  

‘The crisis strengthened demand’

Raising a fund in the middle of a financial crisis doesn’t normally augur well for  prospects, but Lucas de Beaufort explains how EMP Latin America actually benefited from a tough market

Firm: EMP Latin America
Fund: Central American Mezzanine Infrastructure Fund
Date closed: November 2009
Amount closed: $150 million  

EMP Global is the world’s largest private equity firm investing in emerging markets, holding around $6 billion in cumulative capital commitments across Asia, Africa, Europe, Latin America and the Middle East.

Its Latin American unit recently closed a $150 million mezzanine fund – Central American Mezzanine Infrastructure Fund (CAMIF) – to invest in infrastructure projects across Central America, Mexico, Colombia and the Dominican Republic.

Raising funds right in the middle of one of the worst financial crises in history can have many unintended consequences – most of them bad. So the views of Lucas de Beaufort, a senior associate at EMP Latin America, are somewhat contrarian when he says:

“To be honest, the crisis strengthened our partners’ commitment to the fund because they saw how it would create an increased need in the region for alternative sources of capital. We closed the fund almost like a club deal,” he adds.

CAMIF reached final close late last November with commitments from the Finnish Fund for Industrial Cooperation; the Inter-American Development Bank; the International Finance Corporation, a member of the World Bank group; the Netherlands Development Finance Company; the Central American Bank for Economic Integration; and the Mexican Fondo de Fondos.

“It became clear to us when we were planning CAMIF that the realm of investors was going to be limited, so we quickly narrowed it down to players which already had strategic interests in the region,” explains de Beaufort, “and as a result we ended up with a dedicated group of multilateral investors.”

“We held discussions with private parties, but then the crisis broke and these discussions were abandoned,” he added.

The crisis had no impact on the fund’s $150 million target size. “We felt comfortable with that target. We felt all interests would be better served with this size,” he says. “Another important part of the fundraising was that we sold the fund from a co-investment angle so that our partners can co-invest senior debt, mezzanine or equity in whatever projects we invest in,” de Beaufort says.