Investors pause as economies weaken

Total global infrastructure fundraising was a mere $2 billion in the first quarter of 2011, according to Probitas Partners. While there are tentative signs of progress, the boom times are far from back. We decided to probe the reasons why by asking some leading placement agents the following question:

“What are the main obstacles preventing limited partners from committing capital to infrastructure funds today?”      

“There are a number of issues that investors are dealing with that are holding them back. A number of them are still dealing with impacts to their portfolios of the financial crisis, and though the rebound from market bottoms in the spring of 2009 has certainly helped many, concerns over renewed economic weakness in the US and Europe that have developed over the last few months are giving certain investors pause.

This concern affects all illiquid alternative assets as it is more difficult to adjust these allocations in times of change. For infrastructure in particular, many investors are adamantly focused on fees, especially for core brownfield funds, and many LPs are holding their ground and not investing until terms are changed to suit their liking.

The infrastructure market also has a larger number of sponsored funds compared to private equity. Many of these sponsors were hurt in the crisis making for difficulty in raising follow-on funds or leading to spinouts, so the GP side of the equation is in a bit of turmoil.”
– Kelly Deponte, partner, Probitas Partners, San Francisco

“One: Lack of history of most infrastructure funds making it difficult to benchmark or determine what funds to invest in. Energy is an exception where a long history exists.

Two: Education on the space due to limited experience. Infrastructure is a broad area and includes many industries and greenfield and brownfield projects. Each is a specialty business with its own set of risks and returns. Many LPs are still trying to figure out what areas make the most sense to invest in.

Three: Fee structures on brownfield infrastructure since low expected returns make it hard to pay fees to GPs.

Four: Lack of product with heavy competition in US brownfield infrastructure along with high political risk relating to PPPs.

Five: Lack of comfort with 20-year structures compared to 10-year private equity structures.”
– Robert Johnston, chief executive, Beacon Hill Financial Corp, Boston (with input from William Nordland, managing director, Panda Power Funds)

“The liquidity issues encountered by LPs over the last couple of years have eased, so we are seeing LPs committing capital to unlisted funds, albeit cautiously. One of the obstacles for LPs with an existing allocation to infrastructure is capacity to allocate additional capital to the asset class. Due to financing issues, many infrastructure managers did not meet yield targets, meaning LPs have not received the distributions they were expecting when they initially invested.

As the asset class matures, LPs have more options available to deploy capital outside of traditional closed-end infrastructure funds. We are seeing experienced infrastructure investors commit capital into direct and co-investment opportunities as well as joint ventures. Those LPs newer to the asset class continue to deploy capital into infrastructure funds.

While there are an increasing number of funds and structures available, the key obstacle for LPs investing in funds is getting comfortable with GP track records. Many 2006-7 vintage managers who are back in the market with their follow-on-funds under-performed due to financing issues and strategy drift.”
Michaela Sved, director, MVision Private Equity Advisers, London

“I’m not sure I agree with the question, as I believe LPs are becoming more willing to commit to the infrastructure  asset class.

My sense is that in recent years a lot of capital has been deployed into the North American energy sub-sector in particular, at least among US institutional investors. The primary focus to date has been on private equity strategies, but LPs now have a better understanding of the most favourable attributes of the underlying infrastructure assets.

They also increasingly are viewing infrastructure commitments as part of a real assets investment class, which means that there is now more of a focus on inflation protection, managers who can add value through operational improvements rather than with just increased financial leverage, and the generation of current income.”
– Brian Chase, senior vice president, Campbell Lutyens, New York