A multi-billion-dollar headache for GPs

Given a still-lacklustre fundraising market, a $7.5 billion first close was bound to raise a few eyebrows.  That was the milestone reached by the Global Strategic Investment Alliance (GSIA) towards the end of April – not a conventional fund, but rather a “platform” of institutional investors led by Canada’s $55 billion Ontario Municipal Employees Retirement System (OMERS) dedicated to investing in large-scale infrastructure opportunities.

But if you think $7.5 billion is big, what about the platform’s $20 billion target? Can that possibly be reached? And, in a world where conventional infrastructure funds are jostling for a limited supply of capital, what are the implications if institutional investors are able to gobble up that kind of money for direct – rather than intermediated – investment?

One of the attractions of the GSIA is a favourable competitive environment given that few can play in an arena involving tickets of between $2 billion and $4 billion – and yet OMERS claims to have done extensive research showing that returns from the largest assets demonstrate out-performance compared with smaller assets. Even OMERS can’t play this game on its own, which is why it committed $5 billion at the inception of the GSIA towards the end of 2009 and then set Jacques Demers, OMERS Strategic Investments’ president and chief executive, the task of jetting round the world to haul in partners.

Demers has been seeking out “like-minded” institutions attracted to investments in assets with secure, often-regulated, steady cash flows offering low-teens IRRs over a holding period of around 15 years. You wouldn’t think there would be a shortage of institutions keen on this kind of profile, especially given that the assets will be managed by Borealis, OMERS’ investment arm. Borealis has a 15-year track record of infrastructure investment and is well accustomed to the larger end of the deal spectrum having, for example, acquired the UK’s High Speed 1 rail concession alongside Ontario Teachers Pension Plan in a $3.4 billion deal in November 2010.

But, having launched in 2009 in North America – and progressively taken its marketing message to other parts of the world since then – some will wonder why the GSIA only attracted two partners to the first closing. Both are Japanese – the Pension Fund Association and a consortium led by Mitsubishi Corporation – and both committed the $1.25 billion necessary to gain “full membership” of the platform.

Sources close to the fundraising say the Eurozone crisis was a very unhelpful distraction as the GSIA headed towards its first close, which it was hoped would take place by the end of 2011. Having then decided it was imperative to get the first close wrapped up by the end of Q2 2012, the pragmatic approach was to close with two partners rather than the anticipated four. However, there is a strong belief in the OMERS camp that other partners will come on board soon.

Unable to commit

There have been other difficulties, say the sources. For example, many investors interested in the proposition are unable to commit the full $1.25 billion, so OMERS is understood to be exploring ways of allowing some kind of partnership to those which can only contribute half that amount, or even less. Others have their own infrastructure teams and are therefore unsure whether they can justify being part of a platform where assets are managed by another organisation’s team.

Still, $7.5 billion is already a number to catch the eye and infrastructure general partners (GPs) will be hoping the number doesn’t climb too much higher – and certainly not as high as its $20 billion maximum. After all, the GSIA charges no carried interest and only modest management fees on invested capital. As such, it’s another challenge to fund managers’ fee structures at a time when institutions seem ever more keen to demonstrate that they can do infrastructure investment for themselves.