‘Watch for the pendulum to swing’

“Twenty-twelve has seen progressive development in infrastructure investment in North America, highlighting that capital is available for a fund manager with a well-defined strategy and proven track-record. However, fundraising has been impacted by due diligence, which is taking longer to complete and seeking greater understanding about what is being offered and how it can be accretive. Increased due diligence, while frustrating in some respects, is certainly healthy for the overall progress of infrastructure.

“Institutional direct investment, emulating Australia and Canada, has leveled off somewhat. This desire was initially driven by concern over fee structure and misaligned fund structure. It also stemmed from the belief that investing directly is better value for money. However, implementation of this strategy has been restricted, and there is increasing recognition that fund investing is beneficial.

“Sector wise, there is a significant focus on North American energy, driven by higher historical returns and shale gas. There is also sizeable interest in both the US and internationally in putting money to work in public-private partnerships (PPPs).”
-James Sladden, associate, Campbell Lutyens

“North American infrastructure fundraising can be split broadly into two categories – the kind of fund headquartered in North America and focused on investing there, and the kind of fund investing globally from a North American headquarters.

“As far as funds focused strictly on the North American market, interest has slowed considerably since 2010, when $7.3 billion was raised for the sector. As of the first half of 2012, only $1.25 billion was committed to such funds.

“Most of the funds targeting North America now are smaller, newer efforts without deep track records, and those funds targeting core ‘brownfield’ deals have to deal with investor perceptions of continued turmoil in the US public-private partnership (PPP) market as governments back away from executing transactions.”
Kelly DePonte, partner, Probitas Partners

“As far as global funds are concerned, fundraising is still strong but volatile. Though there are funds with global investment mandates headquartered in Europe and Australia, a number of the largest are headquartered in the US and a single large closing by one of these usually well-established funds can dramatically swing fundraising totals. For example, the second close of Global Infrastructure Partners II (GIP II) in the first half of 2012 at $5.5 billion represented over a quarter of overall fundraising.

“While the majority of fundraising activity over coming years is expected to remain focused on infrastructure funds, a growing number of investors are exploring alternatives. One approach gaining prominence, particularly among Australian and Asian institutions, is to invest directly. Although commonly the domain of the largest North American investors, such as Ontario Teachers’ Pension Plan and the Canada Pension Plan Investment Board, many investors with as little as $1 billion in assets and two-person teams are now investing directly.

“In addition, structures such as separate managed accounts provide a number of benefits for funds that either don’t have the resources to run large direct infrastructure teams or elect not to. These include the ability to club with experienced managers, while having greater input into the investment process, tailoring the portfolio to reflect the circumstances of the investor, and better matching the duration of assets and liabilities.”
-Graham Matthews, chief investment officer, Access Capital Advisers

“It has become all about ‘direct investing’ now which means creative co-investment structures. Time will tell how institutional investors will fare as direct investors but most are looking at funds in this asset class now as educational opportunities, more than as money managers. Watch for the pendulum to swing back soon. Talented experts need to be compensated and incentivised and the investment fund model, flawed as it may be, is a functional solution.”
-Joel Moser, partner, Kaye Scholer