Why cheque books are closed

In reporting  the latest fundraising figures from placement agent Probitas Partners, we took the opportunity to highlight the disparity between the ever-increasing number of infrastructure funds in the market and a sudden drop in the level of fundraising.

In the first quarter, Probitas identified 111 funds seeking a total of more than $85 billion in capital, compared with 95 funds seeking $75 billion at the end of last year. But the level of fundraising stood at $2.2 billion, comprising just three final closes and 13 interim closes during the three-month period. This brings into question the sustainability of the apparent post-Crisis revival in infrastructure fundraising last year, when the total amount raised climbed to $19.0 billion compared with $10.7 billion in 2009.

Volatile period

Of course, the usual caveat about quarterly figures applies – three months is arguably too short a timeframe to draw meaningful conclusions. Moreover, a pause in fundraising activity had been flagged up at our Berlin forum in March –  the result, some said, of a particularly volatile period of global economic uncertainty, political unrest in the Middle East and North Africa, and devastating natural disasters such as the earthquake and tsunami in Japan. Such events tend to make institutional investors hit the pause button.

Nonetheless, part of the positive vibe in Berlin was a sense that 2011 was likely, overall, to see a reasonably strong – if unspectacular – year for infrastructure fundraising. And with fund managers such as Global Infrastructure Partners, Meridiam Infrastructure, CVC and Highstar Capital out in the market, why shouldn’t that be the case?

Time will tell of course, but it’s also worth noting that this is a time of LP rebellion – and this, too, may be reflected in the first-quarter figures. In his Underpinnings column on p.12, Bruno Alves provides tips for those on the fundraising trail as to how they might meet the expectations of would-be investors. This includes a reflection on how important it is to innovate on fee structures, which has been a contentious issue for some time.

But there are also broader issues of alignment of interest, as will become clear when you read the views of participants in our European LP roundtable on p.27. No one would envy those raising funds from having to leap over a bar that has clearly now been set very high. But leap they must, and LPs should not be blamed for seeking to squeeze GPs in exactly the same way that they themselves were squeezed by fund managers until the Crisis loomed into view.

Aside from this shifting balance of power, driven by GPs’ desperation for more capital and LPs’ determination to be careful with their money, there is another quite subtle consideration. Do LPs really feel confident that they understand the risk/return profile of what they are investing in? In a recent conversation, an infrastructure funds of funds manager made the argument that it’s less instructive to see infrastructure as an asset class than as a range of risk/return profiles.

In a sense, this is no different to other alternative asset classes, which also have a range of risk/return profiles. Perhaps the closest analogy for infrastructure is with real estate, as both have core, core-plus, value-added and opportunistic approaches.

The difference is in the ability to have confidence that investing in certain assets matches a given risk/return profile. In infrastructure, there is a lot of blurring at the edges. For example, the Crisis highlighted the misunderstanding that some investors had regarding the GDP linkage of certain infrastructure assets. Today, investors are forced to view the regulatory risk of renewable energy assets subject to tariff and subsidy frameworks in a rather different light given the way these frameworks have been manipulated by governments facing fiscal crises.

At issue here is a lack of maturity relative to other asset classes. Investors are inevitably taking more on trust with an asset class that has not yet been road-tested through a succession of cycles over a long period of time. Only with greater maturity (and the availability of more data) can certain strategies be appropriately assessed and understood. Until then, it’s inevtable that LPs will be wary of committing capital. When they do, they will also seek to make sure that the fund economics match the strategy.