Investor interest in infrastructure is running at an all-time high. But the word on the street is that there are too many infrastructure funds out in the market. Is this a paradox? Not necessarily. What some limited partner (LP) investors and their advisers are saying – to be more specific – is that there are too many infrastructure funds in the market that do not offer a compelling enough proposition.
If you are planning to hit the road in 2011 to raise a new vehicle, here are four things you might wish to consider, based on market feedback gathered by Infrastructure Investor:
Look at the successful fundraisings of last year and you will find that almost all of them had a very clear investment proposition.
Antin Infrastructure Partners closed on €1.1 billion last year on the back of a comprehensive pitch. Talk to chief executive Alain Rauscher and he will certainly tell you exactly how Antin stood out, explaining in detail how the fund’s €1.1 billion size mathematically correlates with the European market and the type of deals the fund plans to compete for.
Developer John Laing’s debut infrastructure vehicle is another good example. It came to the market with a very yield-focused proposition based on acquiring operational Private Finance Initiative (PFI) assets from John Laing. Thanks to its first offer agreement with the developer, it is virtually guaranteed a steady supply of these low-risk projects for years. It raised £270 million (€308 million; $440 million) when it listed on the London Stock Exchange last year.
The moral of these two stories is: go to investors with a well-defined, differentiated investment proposition and you are likely to catch their attention. Try a “generalist” proposition and you probably will not.
Think smaller and locally
It might be tempting to think big when raising a new vehicle to capitalise on increased LP allocations to infrastructure. But actually, most general partners (GPs) would benefit from trying to raise smaller funds with a more regional or local focus.
UK-based infrastructure investor Equitix is raising its second fund on the back of those two propositions. At €150 million in target size, it is unlikely to be demanding big tickets from LPs. Also, by focusing on local infrastructure deals of between €50 million and €200 million, it is targeting a market with little competition and attracting attention from local UK pension funds. The result: it has already raised £100 million after only six months on the fundraising trail.
That’s not to say big, global infrastructure funds with solid track records are likely to fail. But new funds are much more likely to succeed if they scale down their ambitions and narrow their focus.
No GP likes to dwell on this but it’s become an inescapable fact of life. LPs are putting downward pressure on fees and they will not be ignored. Granted, a few GPs will be able to get away with fee structures reminiscent of the private equity model. But most won’t. That means innovative thinking and willingness to compromise.
A few solutions being road-tested today: volume discounts, first right on co-investment opportunities, de-linking management fees from inflation, linking carry to yield instead of returns, and charging management fees close to the 1 percent mark.
Of course, not all compromises are positive. Rumour has it that some funds have accepted being paid management fees only after concluding their first deal. That sort of pressure may not give birth to a very good first deal.
Bring out the A-Team
“Investors want fund managers with a demonstrable track record in the space. The problem with a lot of funds out there is that they lack compelling deal sourcing,” confided a well-known placement agent.
So make sure your team is well-stocked with people that actually have experience in infrastructure and have the right contact book to source proprietary deals. A good brand name might get you a foot in the door. But wallets will not open on that alone.