Rise and rise of the independent funds

Over the first two years in which we ran the Infrastructure Investor 30 (II 30) – our proprietary
ranking of the world’s 30 largest investors in the infrastructure asset class (see p.26 for our methodology) – a sharp battle has been fought between bank-affiliated funds and independent funds over the most dominant form of investment in the asset class. In this, the third year, the battle appears to have been decisively won by the independents.

In the first year of the II 30 in 2010, the bank-affiliated funds were just ahead, accounting for $48.6 billion of infrastructure capital raised over the qualifying five-year period, compared with $47.9 billion for independent funds. Last year, we pondered whether a changing of the guard was being witnessed as the independents pulled slightly ahead, by the small margin of $54.9 billion to $54.3 billion.

In 2012 – with the qualifying period for funds raised running from 1 January 2007 to 30 April 2012 – the independent funds have stretched further away from the bank-affiliated funds, with $60.56 billion raised by the former and $54.69 billion by the latter.

Benign fundraising

The figures are interesting because they reflect the evolution of the asset class. 

In the early days, it came to be dominated by the investment banks, which raised private equity-style funds and applied private equity-style techniques to infrastructure assets. In the years prior to the collapse of Lehman Brothers, it was possible for the banks to raise very large funds in what was a benign fundraising market. The likes of Australia’s Macquarie Bank and the nowdefunct Babcock & Brown, as well as US giants such as Goldman Sachs and Morgan Stanley, were the industry’s big beasts.

But with the onset of the global economic and financial crisis came a shift to more conservative financing techniques as well as structural and regulatory obstacles which have dissuaded or prevented banks from committing large amounts of risk capital. This has led to a diminishing supply of capital for the bank-affiliated funds as well as the spinning out of many of these funds’ management teams to form new, independent fund managers – witness the emergence of Arcus Infrastructure Partners and SteelRiver Infrastructure Partners from Babcock & Brown, for example (both of which now feature in the II 30 ranking).

This year’s II 30 underlines that these independent funds are now the recipients of the bulk of the capital being committed to the infrastructure asset class. Moreover, this trend is only likely to be exacerbated in future rankings as the infrastructure fundraising ‘boom years’ (when the bank funds were in their pomp) continue to be removed from the rolling five-year qualification period.

With capital raised in 2006 being deducted from this year’s qualifying period, Macquarie Infrastructure and Real Assets’ dominant position at the top of the table has been scaled back by a material margin – its total falling from $31.83 billion last year to $23.72 billion (though it still boasts around double the capital of closest rival Brookfield Asset Management).

Meanwhile, a dramatic fall down the rankings for Goldman Sachs, from 2nd last year to 17th this year, may be attributed to the loss from its five-year total of the $6.5 billion fund it closed in 2006. Nor is the trend we have identified likely to be arrested – 2007 and 2008 were years in which the bank funds continued to raise large amounts of capital, but they will disappear from the five-year qualifying period over the next couple of years.

Of course, the point should be made that very few firms have had it easy on the fundraising trail in the post-crisis period – just because you’re an independent fund, it does not guarantee you the unwavering support of the limited partner community in tough times like these.

The difficulty of fundraising recently is highlighted by the fact that the total amount of five-year capital accounted for by the II 30 this year is $171.5 billion, compared with $183.1 billion at the same time last year. But those which do benefit from investor support will soon rise up the rankings – witness Global Infrastructure Partners’ advance from 13th place last year to 3rd this time as its second fund registered a first close on $3 billion following on from the first fund’s $5.64 billion close in 2008. (A second closing for Fund II on $5.5 billion was announced just after the deadline for inclusion in this year’s ranking).

One outcome of this year’s results that may give some pause for thought is the lower total contributed by pension funds. In last year’s ranking, the aggregate funding for infrastructure set aside by pensions in the top 30 totalled $53.9 billion – this time, the equivalent figure is $49.5 billion. There is no doubt that some pensions are a growing force. QIC, the Queensland public pension manager, had risen from 22nd in the 2010 ranking to ninth last year ($6.24 billion) before making a further climb this year to sixth ($6.88 billion). And Canada’s Ontario Teachers’ Pension Plan, which ranked 11th last year on $5.81 billion, rises to seventh this year with $6.87 billion.

Sobering

However, at a time when governments around the world are increasingly seeing pension funds as a possible solution for the long-term funding gap for infrastructure (though admittedly this tends to focus more on the debt need than the equity requirement), the overall decline in the availability of capital from the top pension funds is a sobering finding.

Questions will arise about whether this is due to a plateauing or declining interest in the asset class – which seems unlikely given the enthusiasm generally expressed in surveys – or whether there are structural issues standing in the way of pension funds making the level of commitment to the asset class that they would like.

Rank Since
2011
Name of Investor
5-Year Capital 
Creation Total ($bn)
 1  =  Macquarie Infrastructure and Real Assets  $23.72
 2  ?  Brookfield Asset Management  $11.16
 3  ?  Global Infrastructure Partners  $8.64
 4  ?  Canada Pension Plan Investment Board  $8.41
 5  =  APG Asset Management  $7.80
 6  ?  QIC  $6.88
 7  ?  Ontario Teachers Pension Plan  $6.87
 8  ?  Alinda Capital Partners  $5.90
 9  ?  Industry Funds Management  $5.51
 10  ?  ArcLight Capital Partners  $5.43
 11  ?  OMERS  $5.02
 12  ?  Arcus Infrastructure Partners  $4.99
 13  ?  Energy Capital Partners  $4.79
 14  ?  RREEF Infrastructure  $4.35
 15  ?  Highstar Capital  $4.25
 16  ?  Future Fund  $4.20
 17  ?  Goldman Sachs  $4.17
 18  ?  La Caisse de Depot et placement du Quebec  $4.14
 19  =  Morgan Stanley  $4.00
 20  ?  JPMorgan Asset Management  $3.90
 21  ?  AMP Capital  $3.83
 22  ? Universities Superannuation Scheme  $3.80
 23  ?  British Columbia Investment Management Corporation  $3.74
 24  ?  Steel River Infrastructure Partners  $3.73
 25  ?  Colonial First State  $3.72
 26  ? UBS Global Asset Management  $3.60
 27  ?  Citi Infrastructure Investors  $3.40
 28   ?  Energy Investors Funds  $3.06
 29  ?  AXA Private Equity  $2.90
 30=  ?  Alberta Investment Management Corporation  $2.80
 30=  ?  Kohlberg Kravis Roberts  $2.80
     Total:  $171.51