Solid foundations

That infrastructure is increasingly viewed as a unique investment category is evident. Witness a Kohlberg Kravis Roberts regulatory filing in March, in which the storied alternative assets firm – in the market with its first infrastructure fund – said it views infrastructure as a “distinct asset class”.

But if this is indeed a unique space to invest in, then it should perhaps come with its own unique investment models: opportunities to do exciting things you cannot do in any other asset class.

In the following pages, we reflect on one such opportunity, told through the stories of four fund managers which have sought to capitalise on it. One prominent academic describes it as “infrastructure by gestalt”.

Etymology

In reaching for the word “gestalt,” Stanford University’s Ryan Orr, executive director of the Collaboratory for Research on Global Projects, had in mind the rough German translation of the word as “shape”, “form” or “figure”. In applying it to the infrastructure space, he is referring to managers giving their funds a starting shape or form before they hit the fundraising trail.

“A group three or four local and regional banks, pension funds, multilaterals, and government sponsors coalesce and form an ‘anchoring coalition’ [for a fund],” he says. Once this core group is in place, the manager goes out to raise capital from other institutional investors.  

“I think this phenomenon is wholly unique to infrastructure,” says Orr, crediting it to the asset class’s political sensitivity and developmental benefits. “For example, I don’t see this ‘gestalt model’ being applied in other areas of private equity, hedge [funds], or real estate”.

In theory, it’s not dissimilar from the traditional private equity approach of securing an “anchor investor” before hitting the fundraising trail in force to get other institutional investors to buy into the proposal. And how do you typically get an anchor commitment? Normally, it would involve printing a glossy private placement memorandum, hiring a placement agent and hitting the road.

The problem with this approach is that, in the wake of the financial crisis, it has not proved effective for first-time funds in infrastructure (which, incidentally, account for the majority of funds in the market). Many have gone for months – some a year or longer – without that much-coveted first investor which anoints the fund and prompts others to come in from the sidelines. As one fund manager related to us earlier this year, it’s not unlike that sobering moment during everyone’s college career when the dean tells entering freshmen to look to their left, look to their right and then says: “Only one of you will remain standing at graduation.”

Hot out of the oven

So it’s no surprise that some managers have tried a different strategy in getting their funds up and running. In some cases, this so-called ‘gestalt’ was handed to them fresh out of the oven by global development institutions.

This was the case with Montreal-based private equity and debt manager Cordiant Capital, which in December 2009 won the management rights to the International Finance Corporation’s (IFC) Infrastructure Crisis Facility Debt Pool.

The debt pool is part of the larger $10 billion Infrastructure Crisis Facility the IFC created to fill the financing gap caused by the withdrawal of lenders from emerging markets during the financial crisis by lending to selected infrastructure projects.

The pool’s backers include a large number of governments, banks and international development organisations, including the German government (€70 million), German bank KfW (€500 million), the European Investment Bank (€1 billion) and Proparco, the French development organisation (€200 million).

Meanwhile, Ashmore, the emerging markets-focused private equity firm, won a competitive bidding process in 2009 to manage a Colombian government-sponsored infrastructure fund. The Colombia Infrastructure Fund Ashmore I came together after the Colombian government, the Inter-American Development Bank, the Andean Development Corporation and the IFC agreed to provide seed funding toward its $500 million fundraising goal.

Elsewhere, “gestalt” models have been put together by fund managers, which have struck up dialogues with regional players to get them aboard the idea of investing in a fund that will channel much-needed capital toward their geographic and sector priorities. This was the case with a number of funds Australian investment bank Macquarie Group has put together over the years, including the Macquarie Renaissance Infrastructure Fund, which focuses on investing in former Soviet states, and the Macquarie Mexican Infrastructure Fund, which won the backing of FONADIN, the country’s national infrastructure fund.

Tangible benefits

Orr believes that getting this type of hefty governmental and developmental support up-front can translate to a plethora of tangible benefits for a fund manager.

To begin with, it provides strong political cover. For example, if a fund invests in projects in Colombia with the backing of the Colombian government, it becomes harder for the naysayers to level charges of the private sector ripping off the public.

Partnership with local and regional development institutions can also give the manager access to deal flow. An institution like the IFC, for example, invests directly in projects and maintains a steady dialogue with local political leaders about priorities in their pipelines.

Most importantly, it sends a strong message of endorsement to international institutions who might invest in the fund. Asking them to become anchor investors is often a deal-breaker, says Orr. Not so when local and regional governments and institutions support the fund. 

It’s no coincidence that a lot of these funds are popping up in emerging markets. By the IFC’s own estimates, emerging markets anticipate an infrastructure financing need of $21 trillion for the years 2008 to 2017. And private capital isn’t always lining up to help plug the gap. In April 2009, just as the IFC launched its crisis facility, Allen & Overy, a London-based law firm, published a survey of international infrastructure investors showing that most of them preferred developed markets like the UK, the US and Germany as solid opportunities for investment.

Small wonder, perhaps, that governments and development institutions in neglected markets are taking a proactive approach to attract investors to their priority investment areas.

Where’s the catch?

For all the obvious advantages of this kind of approach, however, there are potentially less attractive aspects. After all, taking the money of regional and international development institutions can often come at a high price. They have development mandates and priorities they need to fulfill, and a manager’s activities may become constrained, if not subservient, to these ambitions. 

With those mandates and priorities come plenty of reporting requirements, which means managers will likely face a much higher level of scrutiny and oversight than they would in a traditional private equity fund.

Most importantly, development institutions and governments will often do things in their own time. For instance, it’s been more than a year since Ashmore won the management contract for the Colombian fund, and the IFC is only just preparing to put its $20 million commitment to its board for approval. If you’re a time-sensitive manager looking to secure anchor commitments before the clock runs out on your fundraising period, this could present a big problem.

There again, consider the European Union’s €1.5 billion Marguerite Fund. Launched in December 2009, the fund, which will target the EU’s priority areas for development, held a substantial first close on €750 million in March this year. This underscores the importance of striking up conversations with key players early in the process. In the absence of that dialogue, the whole project may fall apart.

Shape of things to come

Only time will tell whether this model will truly take off and lead to a new way for the public and private sectors to partner in tackling the world’s infrastructure deficits.

But if it does, it could be a unique route for infrastructure managers to seek out under-served markets, start up dialogues with regional stakeholders and pitch financing solutions that help them tackle their financing deficits.

As evidenced by the American Society of Civil Engineers’ estimate of the ever-growing infrastructure spending deficit for the US – $2.2 trillion at the last count – developed markets, too, could prove fertile ground for such dialogues.

“I suspect that there are many other regions where this model could be successfully employed, including potentially in the US and Middle East,” says Orr.

Case study 1
Marguerite: an experimental club

The EU’s new €1.5bn vehicle will test whether market principles can be combined with public policy goals.

The key to understanding what the European Union’s (EU) new €1.5 billion Marguerite infrastructure fund is about is to view it as an experimental vehicle that will serve as the first step in forging an enduring bond between a club of like-minded, long-term investors.

Marguerite is the brainchild of several EU institutions and state-backed banks. Its goal is twofold. In the short term, Marguerite will “act as a catalyst for infrastructure investments implementing key EU policies in the areas of climate change, energy security, and trans-European networks,” the fund says.

In the longer term, it aims to “serve as a model for the establishment of other similar funds in the EU wishing to combine a market-based principle of return to investors with the pursuit of public policy objectives,” it adds.

Aiming to raise €1.5 billion, its six core sponsors – the European Investment Bank (EIB), France’s Caisse des Dépôts (CDC), Italy’s Cassa Depositi e Prestiti (CDP), Germany’s KfW, Spain’s Instituto de Crédito Oficial and Poland’s PKO Bank Polski – announced at the fund’s launch that each would commit €100 million, making sure it had almost half of its intended target amount before it even reached its first close. In March, it surpassed the €700 million-mark on reaching its first close.

It’s a powerful statement of intent from these pan-European institutions to have signaled their long-term commitment to the fund (it has a lock-up period of 10 years) before throwing the door open to other like-minded public and private players. In this sense, Marguerite will be the first vehicle to test the philosophy outlined by the Long-Term Investors Club (LTIC), an organisation founded in the aftermath of the financial crisis by four of Marguerite’s core sponsors – CDC, CDP, the EIB and KfW.

The LTIC aims to foster international cooperation between sovereign wealth funds, public sector retirement funds, private sector pension funds and other actors suited to long-term investment. Marguerite “can be considered as a first example of [this] new type of cooperation,” the fund said.

If successful, everybody wins: LPs walk away with new partners capable of establishing strong investment vehicles; and the EU finds financiers to fund its projects – including potentially riskier investments, like renewable energy.

The test will be whether it can successfully pull off its stated objective of “combining market principles while still supporting public policy objectives”.

Case study 2
IDB & CAF: approached by government  

The Inter-American Development Bank and the Andean Development Corporation were instrumental last year in setting up two Latin American infrastructure funds worth around $1bn.

The Inter-American Development Bank (IDB) – Latin America’s largest development institution – was busy last year living up to its slogan of being “a partner for Latin America and the Caribbean” in tandem with another regional multilateral – the Andean Development Corporation (CAF).

The multilateral duo teamed up to foment infrastructure investment in the region and were instrumental in launching two Latin American infrastructure funds now managed by private investment firms Ashmore and Brookfield Asset Management.

The blueprint for both funds is similar: CAF and IDB were approached by two Latin American governments (Colombia and Peru) to help develop private sector infrastructure investment in their countries. They set up funds with secured commitments from both countries’ respective governments and their own balance sheets, drumming up local pension fund interest in the process. Following that, they then recruited renowned international firms to serve as the funds’ general partners (GPs) and continue the fundraising.

In Colombia, the IDB approved a $75 million investment for the Ashmore Colombia Infrastructure Fund last October, managed by the emerging markets investor together with Colombian investment bank Inverlink.

That investment was followed by a $40 million commitment in December by CAF. Colombian state-backed bank Bancoldex should make its commitment available soon, with Colombian pension funds and public and private investors set to help the fund reach its $500 million target size. It has a hard cap of $750 million.

Brookfield’s Peruvian venture followed a similar trajectory, with secured investments from the Peruvian government of some $100 million followed by roughly the same combined amount from CAF and IDB. Local pension funds said they were prepared to invest some $300 million in the venture. Brookfield and local partner AC Capitales were selected to manage the fund and continue the fundraising effort, also targeting $500 million with a $750 million hard cap.

In both cases, CAF and IDB’s presence is intended to serve as a catalyst for similar, future private initiatives. 

The intended effect is not far removed from what Marguerite is trying to achieve in Europe. But these funds are managed by outside private investors who are invited to actively co-invest in the vehicles they manage.

Case study 3
Macquarie Capital: local starting point 

Local partners and political cover – the ingredients of success for Macquarie’s emerging markets model.

If there is a pioneer of what Orr calls the “gestalt” model for fund creation, it is undoubtedly Macquarie Capital.

The investment banking arm of Macquarie Group, long known for its interest in infrastructure, has lately been expanding its funds business into new regions – and with it, banking on the support of local partners to make its business work.

Take the latest Macquarie Capital Funds Quarterly, for instance. This publication, which details the status of Macquarie Capital’s 46 funds worldwide, counts no fewer than four new infrastructure funds focused on developing markets: India, Mexico, Russia and China – each with a local partner or partners helping it get its business off the ground.

It’s not that Macquarie has abandoned its appetite for developed markets, cautions Nicholas van Gelder, head of Macquarie Capital Funds for Asia and the Middle East. But the firm clearly senses opportunity in infrastructure-hungry developing markets and is moving fast to take advantage.

The recently-launched Macquarie SBI Infrastructure Fund is a case-in-point of how Macquarie goes about doing so. Once it decided it was going to launch an Indian infrastructure fund, Macquarie went out looking for local partners to give the fund an initial core of support. Standard procedure, says Gelder, for entering developing markets: “I think it’s reasonable to say we haven’t entered a developing market without a local partner.”

The partners Macquarie found for the fund were key to giving it credibility in the Indian market. One was the State Bank of India – the government-owned bank – and the other was the International Finance Corporation, the World Bank’s private investment arm.

Together, they each agreed to invest $150 million in the fund alongside Macquarie. With $450 million in pocket from a state-owned bank, a development institution and Macquarie, the fund was a much more attractive investment proposition. “The next $600 million,” says van Gelder, “came from three institutions, all as a direct response” to the founding block of investors. The end result: a first close on more than $1 billion – this at a time, April 2009, when very few funds were achieving closings of any kind for infrastructure.

Macquarie is now hard at work on a local tranche for Indian investors – another significant aspect of how to successfully make the model work. Local investors are crucial, says van Gelder, because giving them exposure to the asset class can help secure a wave of investors for future funds. But there’s also a more practical reason.

“Local capital is the cheapest capital to use for long-term infrastructure investment,” he says, citing local investors’ currency needs and political attractiveness vis-à-vis their governments. The same goes for the IFC and the State Bank of India. Both are very attractive partners from a political standpoint.

But the benefits accrue both ways, says van Gelder. While Macquarie gets a strong local partner and political cover, the IFC gets to leverage the impact of its capital and the State Bank of India can benefit from the knowledge transfer facilitated by the relationship.

Most importantly, the model is scalable, and there is no shortage of infrastructure-hungry developing markets to enter. “I think expansion of the model in Latin America is definitely on the agenda,” says van Gelder, adding that Indonesia and Vietnam also present opportunities.

Case study 4
Harith Fund Managers: aided by pensions

Africa is a step too far for some investors, but Harith has been able to exploit a pool of liquidity.  

As far as emerging markets go, no region is perhaps more starved for infrastructure – and more ignored – than Africa. Fearing political and repatriation risk, which have to be layered on top of the risk that comes with greenfield investing, many simply decide to sit out this market.

Which, of course, spells opportunity for others – even more so when that opportunity is given a political push.

That is precisely what helped South Africa-based Harith Fund Managers get its $630 million Pan-African Infrastructure Development Fund off the launch-pad in 2007.

The firm’s chief executive officer, Tshepo Mahloele, heard the message loud and clear when South African President Thabo Mbeki said in 2006 that there was enough liquidity in African pensions to easily aid the development of the continent by investing in its infrastructure.

“That is where the idea came from,” recalls Harith chief investment officer Alywn Wessels.
Mahloele, at the time head of the Corporate Finance and Isibaya Fund Division of South Africa’s Public Investment Corporation, decided to launch a fund that would channel local pensions’ liquidity into infrastructure, recalls Wessels.

Since the Public Investment Corporation is the fund manager for South Africa’s Government Employees’ Pension Fund, Mohloele brought the fund to the table as an investor. Its $250 million commitment was a huge vote of confidence, which reverberated with other core limited partners who joined the fund, including the African Development Bank to the tune of $50 million.

“They play a much bigger role than $50 million in our success,” says Wessels, pointing out that the African Development Bank is the “first port of call for any major project in Africa.” He adds:
“So it’s nice to have then as an LP. You pick up leads.”

By September 2007, after several other African insurance and financial institutions signed on to the fund, the firm held a first close on $630 million. The aim then was to use the success of that core group of local partners to market the fund to international investors and hopefully close on $1 billion in total commitments.

“That fell through when the market changed,” says Wessels. Because of the severity of the financial crisis, in mid-2008 Harith decided it would abandon its plans to market the fund internationally.

But now that the Pan-African Infrastructure Development Fund is 40 percent invested – with a 60 percent trigger for raising a second fund – Wessels says Harith is seriously considering hitting the fundraising path again by the end of the year. It will seek to piggy-back off the success of the fund’s relationship with “local blue-chip investors” in attracting international investors.

“You can bring capital to infrastructure in Africa,” he insists.