We’re always hearing about how hard life can be as an infrastructure fund seeking to attract capital in a capital-constrained environment.
But how hard can it be, really? The answer is very hard.
In an almost-certainly first-of-its-kind experiment, we asked a couple of placement agents – Campbell Lutyens senior vice president Brian Chase and Probitas partner Kelly DePonte – to assess the infrastructure fund class of 2012. Actually, our infrastructure fund class of 2012. And it’s a ‘virtual’ fund class, since none of the funds named hereafter actually exist.
Our experience is that funds would do well to double-check their pitches. In fact, if they look anything like our funds, maybe forget about making pitches altogether and call the whole thing off. Becoming a member of the infrastructure fund class in 2012 is a privilege, far from a foregone conclusion.
And if you want industry stalwarts like Chase and DePonte representing your fund, you’d better be in damn good shape.
Those who graduate will have demonstrated aptitude and guile, offered a reasonable fee structure, articulated a realistic understanding of the current fundraising environment, and, perhaps most importantly, have christened their fund with a name that is not easily made fun of.
In many of these respects, our funds failed miserably. Read on to see for yourself.
Based: New York
Background: Superpower is a spinout from Global Advisory, a leading Wall Street investment bank with an initial three-member team, all former senior management at Global Advisory who have a combined 50-year track record in private equity and infrastructure fundraising.
Focus: Energy infrastructure (natural gas, power, renewable energy). Superpower is aiming to invest 70 percent of the fund in developed markets (especially US and Western Europe) and 30 percent in the emerging space.
Fundraising goal: $1 billion. The management team is prepared to commit its own capital to the tune of 1 percent of the total assets under management. Superpower Partners has already secured a $200 million cornerstone commitment from the erstwhile parent, Global Advisory, and is a 10-year closed-end fund.
Fee structure: 2 percent management fee and 20 percent carried interest.
Target return: At least 20 percent internal rate of return.
Brian Chase (Campbell Lutyens): “I like that the team has spun out and is now independent, and that the team has fundraising experience. What is also attractive is their focus on the US energy sector, which is a dynamic space to invest right now. However, I did find cause to avoid the fund. First, there is a possible lack of a proven investment record. There is also the fact that the people managing the fund have an investment banking background, and not a background in the energy sector or experience operating, say, a power plant. The geography for investing is mixed, and, with just 1 percent of their own capital invested, the management team has not enough ‘skin in the game’. Plus, the fund has a private equity structure and a return profile that would indicate the team will take merchant power plant generation risk. I would decline.”
Kelly DePonte (Probitas Partners): “If they are a ‘Superpower’ then why are they not committing more than 1 percent of their own capital? And they claim to have a 50-year track record in ‘private equity and infrastructure fundraising’. What about their track record in investing money? There are only three senior staff onboard? Who is actually going to do the work? And what is Global Advisory
getting for $20 million? Reduced carry? Reduced fee? What is their risk profile? Brownfield? Greenfield? Both? Use of leverage?”
CEMENTCO EQUITY FUND
Background: CementCo Equity Fund is the debut fund launched by CementCo, the global infrastructure developer. The fund is run by a six-person team, three of whom were senior personnel who handled equity investing for CementCo; the three other executives came from elsewhere in the industry.
Focus: The fund will acquire 75 percent of its portfolio from its developer parent company, obtaining the remaining 25 percent via third-party acquisitions, with an emphasis on the US public-private partnership (PPP) market and the UK Private Finance Initiative (PFI) space – both of which are expected to generate immediate yield and stable cash flows.
Fundraising goal: £250 million from stock market listing; CementCo Equity Fund is 30 percent-owned by CementCo and is an open-ended fund.
Fee structure: 0.75 percent management fee and 5 percent carried interest (there is no transaction fee on the portfolio to be acquired from CementCo).
Target return: 8 percent internal rate of return.
Brian Chase (Campbell Lutyens): “Here is what I found to be encouraging about CementCo Equity Fund: their tie to a global infrastructure developer with real operating experience, their emphasis on current yield, a reduced ‘blind pool’ risk, not to mention an attractive fee structure. But this is a first-time fund with a management team that could have a hard time integrating because not all of them have worked together before. There is also a potential valuation issue that would be associated with the asset transfer from CementCo to the fund. Political risk is also a factor given the PFI market in the UK, and the targeted return might be a little too low, and have too much correlation with public equity.
It is possible that I would support CementCo Equity Fund, but I would want to do more due diligence.”
Kelly DePonte (Probitas Partners): “I do not have enough time in the day to vet the potential conflict of interest in the structure and to investigate where each single body might actually be buried (probably
in a ton of cement). A cheap fee structure cannot make up for the potential risk.”
DOWN UNDER INFRASTRUCTURE DEBT FUND (GLOBAL FUND I)
Based: Sydney, Australia – though its parent company is a truly global financial institution.
Background: Global Fund I is the maiden global investment vehicle from Down Under Infrastructure, a highly regarded infrastructure debt fund manager that has consistently raised capital and performed well in its homeland, having met or slightly exceeded its target return on average. The five-member management team has worked together since the formation of Down Under Infrastructure.
Focus: Infrastructure debt investment globally is the stated sweet spot for Global Fund I; with Europe expected to comprise 40 percent of the portfolio, and Australia and the US each making up 30 percent apiece. The fund will target ‘core’ assets in energy, transportation and social infrastructure.
Fundraising goal: $500 million, including a $50 million cornerstone investment from parent company.
The fund is a 15-year closed-end structure.
Fee structure: 1 percent management fee and 10 percent carried interest.
Target return: 10 percent internal rate of return.
Brian Chase (Campbell Lutyens): “The fund has a good track record, an interesting investment strategy involving infrastructure debt and a low fee structure. Plus a team that has suffered no turnover.
The problem will be putting the fund in the right investment ‘bucket’. The team [though experienced] only has experience in Australia, so there is a question about how the fund would go about sourcing infrastructure debt via its parent company. Again, it is possible that I might do business with the fund, but I would want to do more due diligence.”
Kelly DePonte (Probitas Partners): “What do these people know about Europe and the US where 70 percent of the money is going to be placed? And do I trust a group to really understand the US when they seem to not realise that in the States ‘DUI’ means ‘Driving Under the Influence’? And with a debt fund, is a 10 percent IRR really achievable on a net basis?”
Background: Eurozone Capital is the second fund from an independent fund manager whose first fund raised €200 million and is on its way to delivering a decent return; the specialised management team, based in Paris, has suffered from higher-than-expected personnel turnover.
Focus: The fund is a mid-market, generalist investor in Eurozone infrastructure, including renewable energy, transportation and social infrastructure and is expecting to invest 50 percent of its capital in Northern Europe and 50 percent in Southern Europe.
Fundraising goal: €400 million; the management team will commit 0.5% percent of total amount raised from its own personal resources. Eurozone Capital is a 10-year closed-end fund.
Fee structure: 1.75 percent management fee and 17.5 percent carried interest.
Target return: At least 15 percent.
Brian Chase (Campbell Lutyens): “What I like is that this is an independent manager with a track record, and a ‘middle market strategy’ might mean that the team is less inclined to participate in an asset auction. The fund has an easily understood fee structure and an attractive return profile. ‘Decent return’ is a red flag, indicating underperformance, and a problem with realisation. There is also the question of staff turnover. The investment strategy is also undifferentiated and generalist, and there is too much exposure to the ‘wine drinking’ South as opposed to the ‘beer drinking’ North. I would decline.”
Kelly DePonte (Probitas Partners): “Why should I even bother with a fund manager who is not committing at least 1 percent of their own capital to the fund? Where is that key element of alignment of interest?”
GREEN AFRICA EQUITY
Background: Green Africa Equity is a spinout from Rand & Sons, a merchant bank in South Africa. A prior fund launched with $100 million was focused on renewable energy infrastructure in South Africa and was backed with $20 million from Rand. The new fund, a pan-Africa vehicle, will not have a commitment from Rand. Green Africa Equity has a 10-member team based in Johannesburg that has experience investing in continental Africa.
Focus: Pan-African renewable energy infrastructure, especially in solar, wind and hydropower, with an expected commitment of 40 percent of the total amount raised to South Africa and 60 percent to the rest of Africa.
Fundraising goal: $200 million for this 12-year, closed-end fund.
Fee structure: 0.9 percent management fee (with 0.1 percent donated to charity) and 9% carried interest (with 1% donated to charity).
Target return: At least 15 percent internal rate of return.
Brian Chase (Campbell Lutyens): “The team has relevant experience involving renewable energy and the fee structure is attractive, but the fund is a first-time fund, given its pan-Africa strategy, and the charity donation is an inappropriate component for the fee structure and its marketing plan. Given the country risk, the return is low. I would decline.”
Kelly DePonte (Probitas Partners): “Let me see – changing focus so the majority of the fund will be deployed outside South Africa and their cornerstone investment on Fund I is passing – should I maybe take a hint from the one investor with the most knowledge of them and pass on this? Also, I have no idea what the fee structure was on the first fund, but the management fee on a $200 million fund is not great. If they are now going to be doing due diligence all over Africa, they really need more than 0.8 percent per annum to create the infrastructure to manage the fund effectively. If it was a $2 billion fund, I might feel differently, but I put faith in the staff for success – not crow because the fee I paid was so low.
Why should I care that the general partner is setting aside money for charity? What he is telling me through this structure is that he can actually run this fund at 0.8 percent and 8 percent (not sure I believe him, but there it is). But he is then going to charge me more to run his business, and direct the excess into a charity of his choice. As a pension plan I have a fiduciary duty to maximise return for the programme, and if the institution should decide to make a charitable donation, the proper people need to decide to whom and how much.”