Raising GPs

Raising capital for a new asset class used to follow a fairly predictable pattern: the asset class emerges; pioneers and specialists concentrate their expertise and form a general partner (GP); said GP then flies around the world convincing limited partners (LPs) why the new asset class is a good fit; and a whole new funds market is born.

Eventually, after a few years, certain LPs would feel comfortable enough with the asset class to start investing directly in it, and would acquire the in-house expertise to do so. That’s been pretty much the story with infrastructure equity thus far. But when it comes to the new – and very much in-demand – asset class of infrastructure debt, the trend has mostly been reversed.

That is to say, the largest pools of capital are, arguably, not being aggregated into comingled funds raised by sector specialists (think Global Infrastructure Partners, on the equity side, for example). In the infrastructure debt space, the largest pools of capital are actually going out and either ‘raising’ their own in-house GPs, or setting up exclusive, managed arrangements with existing managers.

For examples of the former, look no further than two premier European insurers: France’s AXA Group and Germany’s Allianz.

AXA recently made a big splash when it announced it was willing to commit up to €10 billion for infrastructure debt over the next five years, including underwriting up to €500 million per individual deal.

But it isn’t hiring a third-party manager to handle that allocation; instead, it has hired infrastructure veteran Charles Dupont – late of Antin Infrastructure and the Caisse de dépôt et placement du Québec – to build a team and manage the commitment within AXA Real Estate, a unit which already manages a €7 billion commercial real estate debt platform.

Isabelle Scemama, head of AXA Real Estate, told Infrastructure Investor following the announcement that the infrastructure debt platform, for the moment, will only be available to AXA’s various entities, although it may be opened to third-party clients at some point in the future.

Much the same can be said of Allianz Global Investors’ (AllianzGI) infrastructure platform, helmed by Deborah Zurkow, although there are differences.

Zurkow and her four-strong team moved from monoline insurer Trifinium Advisors – where, over the last decade, they managed more than €10 billion in senior infrastructure debt – to AllianzGI late in 2012 precisely because the insurer felt the infrastructure debt market was starting to coalesce into a genuine opportunity and that the best way to tap into it was to build an in-house team.

Unlike AXA, though, Zurkow’s team is already managing third-party capital from other AllianzGI clients through a segregated account, in addition to Allianz’s allocation. While AllianzGI would not comment on the amount it is currently managing, sources suggest it is well north of €400 million. In addition, Zurkow has previously said she’s open to considering other structures, like blind pool funds, in which Allianz may also participate.

Managed accounts

When established fund managers are invited to the infrastructure debt party – or showcasing themselves as attractive invitees – they are very often going down the managed/separate accounts route.

Shortly after AllianzGI’s announcement, Australian financial services firm Macquarie launched a new infrastructure debt business in London – known as Macquarie Infrastructure Debt Investment Solutions – on the back of a $500 million mandate from insurance and reinsurance group Swiss Re.

Earlier in 2012, Industry Funds Management (IFM), something of an old hand in the infrastructure debt space, decided to boost its debt team to better focus on the UK and continental Europe, hiring David Cooper, Barclays’ former head of infrastructure and structured project finance team in London, to build a presence in these markets.

Like most of the above, IFM is also declining to raise an infrastructure debt fund:

“Everyone talks about funds, but that is not the only vehicle for managing investments. We would raise a fund if we thought that was the best way forward. But when it comes to non-conventional asset classes, we’ve found that investors often prefer customised solutions. These assets are illiquid and investors don’t want to be dependent on other people’s exit strategies,” IFM’s global head of debt investments, Robin Miller, told Infrastructure Investor.

This preference for customised solutions extends outside the traditional GP/LP players.

French bank Natixis, for example, seems to be carving quite a niche for itself as a provider of bespoke infrastructure debt solutions. Recently, it established a partnership to co-invest in infrastructure debt with French insurance firm CNP Assurances. Natixis will originate primary transactions for CNP Assurances to sift through, and the latter will select deals of between €50 million and €150 million to invest in.

The goal is to help CNP build a €2 billion portfolio over the next three years, serviced and administered by Natixis. In October 2012, Natixis pioneered the first such arrangement with Belgian insurer Ageas, again to help it build a €2 billion infrastructure debt book over a two-to-three year period.

Clearly inspired by Natixis, the UK’s Lloyds Bank and its insurance arm, Scottish Widows, entered recently into an infrastructure debt partnership – which was kick-started by Lloyds transferring more than £700 million (€823 million; $1.1 billion) of social housing association loans and £100 million of university accommodation loans to Scottish Widows. The pair intends to originate more infrastructure deals, starting in 2014.

Where are the funds?

That’s not to say that infrastructure debt funds aren’t out there or have little chance of being successful.

The winner of Infrastructure Investor’s most recent European Infrastructure Fundraising of the Year award – Gravis Capital Partners – is a debt fund – and a listed one at that – focusing on subordinated debt and, increasingly, senior debt too.

A recent conversation with Gerry Jennings, principal for infrastructure debt at AMP Capital, revealed the Australian fund manager is nearing a first close for its second infrastructure subordinated debt fund, targeting $1 billion, which it launched last December.

Jennings was bullish on AMP Capital’s fundraising prospects, pointing out that “the educational piece has largely gone out of the fundraising process. We don’t talk to LPs anymore about which bucket their allocations will come from”.

But of course, there have also been some high-profile failures in the infrastructure debt fund space. Pioneering fund Aviva Investors Hadrian Capital Fund 1 – managed by Marc Bajer’s Hadrian’s Wall Capital – recently decided to return the circa £150 million it had raised at first close back to its LPs, after being unable to execute on its capital markets conduit model.

Broadly speaking, “interest in […] debt funds remained modest” during the first half of 2013, according to placement agent Probitas Partners, with only about 6 percent, or $660 million, of the total amount raised by infrastructure funds allocated to debt (see accompanying chart).

Curiously, “the number of fund managers seeking capital for […] debt funds is much higher than the amounts that have actually been able to be raised over the last 18 months,” Probitas noted, adding that “a number of debt focused funds have been launched recently on the back of 2012’s fundraising success”.

In fact, of the circa 110 funds that are either in or coming to market, seeking over $80 billion in commitments, about 17 percent, representing some $13.6 billion of capital, are either pursuing or intending to pursue a debt strategy – a significant slice of the market.

Whether that capital ends up in traditional comingled funds, or eventually migrates to more tailored solutions, remains to be seen.