The biggest challenge in writing about infrastructure fundraising? Finding a living person who is: a) raising an infrastructure fund, and; b) willing to talk about it on the record.
“I know I said I’d do it…but I can’t do it,” pleaded one founding partner who had agreed to be interviewed about his fundraising, only to back-pedal at the vital moment. “My lawyer frightened me out of it, frankly.”
It was mid-summer. The partner explained how his attorney had persuaded him to keep his mouth closed to avoid running afoul of the US Securities and Exchange Commission (SEC) by talking to the press. He now feared the Commission would come down on him hard if he did. Come the autumn, the SEC would lift the ban on so-called ‘general solicitation’ preventing infrastructure funds and the like from being advertised. He wasn’t sure, but he might be able to talk then.
Luckily for North America, the data on fundraising for infrastructure funds so far in 2013 is speaking for itself. Placement agent Probitas Partners reported that global infrastructure fundraising for the first half (H1) of this year totaled $10.7 billion, exceeding the $9.9 billion collected in H1 2012. This year has also turned in some impressive individual fundraisings, notably Brookfield Asset Management (BAM), which by July had raised $6.23 billion for its second infrastructure fund.
Similarly, US public pension portfolios have continued allocating to the asset class. Given their long-dated liabilities, “infrastructure is a good substitute for bonds [in an institutional portfolio],” notes Leo de Bever, chief executive of the $70 billion Alberta Investment Management Company (AIMCo).
In the US (in contrast to Canada, where public pensions are typically direct investors in infrastructure) close to 20 public pensions have allocated to infrastructure funds, with the Arkansas Teacher Retirement System (ATRS), Chicago Park Employees’ Annuity and Benefit Fund (PEABF), the Kentucky Teachers’ Retirement System (KTRS) and the Rhode Island State Investment Council (SIC) all recently making maiden investments in infrastructure via funds.
Certainly, the importance of raising capital for infrastructure in North America cannot be over-estimated.
“Infrastructure is a quasi-social asset, providing a service to a community that, without which, that community cannot survive,” according to Brian Clarke, executive director of business development in North America for Australia’s Industry Funds Management (IFM). “Not only that, but an infrastructure asset is monopolistic in nature — often, the asset is the only provider of that service for that community.”
In America, P3s are the newly feted solution to confronting a nationwide crisis of crumbling and outdated infrastructure. However, in addressing the crisis, PPPs remain an exception, rather than a rule.
“I’m not sure I agree P3s are picking up,” says Kelly DePonte. “The infrastructure market began here in 2004. It’s said continually [that the market is growing] but it really hasn’t developed all that much.”
DePonte, managing partner in San Francisco for placement agent Probitas, notes that the well-being of infrastructure investing in the US is, to an extent, correlated to PPP deal flow.
“The amount of P3 activity focused on the US has fallen so much. The effort has been going on in fits and starts for some time,” DePonte posits. “So the US isn’t faced with a dearth of capital, but compared with Europe and Asia — the number of funds going to America is pretty small.”
BY THE NUMBERS
Based on empirical data, 2013 is shaping up to be a solid outing for infrastructure funds.
According to Infrastructure Investor Research & Analytics, 19 infrastructure funds totaling $15.4 billion reached final close in H1 2013, compared with 24 funds totaling $8.2 billion a year ago, an 88 percent increase. North America-focused funds had raised $1.1 billion at that point, while global funds hauled in the lion’s share of the money, raising $7.2 billion.
To DePonte, the rise of global infrastructure funds is significant for the US.
“The largest group, global funds, is focused on the Organization for Economic Co-operation and Development (OECD),” says DePonte, noting that 34 developed nations comprise the OECD. “A number of them have a slice going to the US.”
DePonte, who has 31 years of fundraising experience, continues:
“A global infrastructure fund might put 40 percent of its assets into Europe, then 40 into North America, with 10 percent going into Australia and the rest into emerging markets,” he explains. “So if the focus is on OECD, the US is getting a large cut.”
As far as infrastructure funds in the market, global infrastructure funds are seeking to raise $64 billion — or 48.2 percent of the aggregate capital being sought, according to Infrastructure Investor Research & Analytics. Meanwhile, funds dedicated to North America have a collective $14.3 billion fundraising goal, the same source shows.
At the same time, the largest funds being raised in 2013 are either dedicated to North America or located in North America.
Topping the list is Brookfield Infrastructure Fund II (BIF II) from Toronto-headquartered BAM. BIF II in 2013 has gobbled up commitments from the Maine Public Employees Retirement System (MainePERS), Teacher Retirement System of Texas (TRS) and New Mexico State Investment Council on its course to surpassing its initial fundraising goal of $5 billion.
BIF II’s fundraising momentum is reminiscent of Global Infrastructure Partners II (GIP II), which collected $8.5 billion in 2012 — a year when the asset class raised $23.3 billion in total. Like GIP II, which is managed by Global Infrastructure Partners, BIF II, under the aegis of Brookfield, a $150 billion alternative asset manager, has leveraged a proven brand name and existing inroads with US LPs.
“[BIF II] doesn’t surprise me, at all,” says DePonte. “Infrastructure is new. There aren’t a lot of infrastructure funds out there with proven track records. Brookfield and GIP are two funds that have that and can raise large funds out in the marketplace. A lot of the infrastructure funds are small, niche-oriented – focused, for example, on just water or wind power. The larger funds, like Brookfield and GIP are diversified platforms focused on OECD. So it’s not surprising that LPs are going for them.”
Behind BIF II, there’s no shortage of funds from general partners (GPs) well-established in America out to market. Most if not all have a global, OECD-focus or are dedicated to North America. For example, Alinda Global Core Infrastructure Fund, from $8 billion Connecticut-based Alinda Capital Partners, is targeting $3 billion. Pioneering infrastructure powerhouse Macquarie Group is targeting $2 billion for its Macquarie Infrastructure Partners III (MIP III) fund, which Macquarie conceived as a North America vehicle. Morgan Stanley Infrastructure Partners II (MISP II), from storied Wall Street firm Morgan Stanley, is looking to collect $2 billion. I-Squared Capital Partners, founded by Morgan alumni, is also targeting $2 billion.
What’s more, the funds coming to market have found willing institutional investors in state pension funds and retirement systems.
JP Morgan Asset Management (JPMAM) dedicated a recent white paper to the increasing pension fund appetite for real assets, like infrastructure, rather than financial assets. Real assets consultant Altius Associates claims institutions will eventually allocate 5 percent of their portfolio to infrastructure funds.
But here’s the bad news: there might not be enough P3s Stateside for funds to invest in.
“We are talking about allocations to funds rather than money being put toward a sector,” DePonte points out, noting that allocations from most US pension plans are not large enough to single-handedly carry a P3.
“The US pensions [that have committed to infrastructure funds] are small and are not going to move the needle,” DePonte explains. “[Meanwhile] Canadians pensions are looking to invest directly in brownfield P3s. So, MainePERS or ATRS coming into the market is not going to have an overall impact.”
IN LINE WITH EXPECTATIONS
“What disturbs me the most is that when I look at the next 10 years I see the need to improve our social infrastructure to help support economic growth, but there isn’t much activity to that end,” de Bever tells Infrastructure Investor.
For their part, infrastructure funds targeting North America that are in the market can at least stake claim to a positive response from institutions.
North America-focused Stonepeak Infrastructure Partners has surpassed its $1 billion fundraising goal, securing money from New Mexico Educational Retirement Board, Oregon Public Employees Retirement Fund, Virginia Retirement System and the Washington State Investment Board. Meanwhile Energy Infrastructure Partners (EIP), targeting $500 million, says its US focus is a selling point to institutions.
“We are focused on middle-market, US infrastructure,” explains EIP managing partner Renwick Paige, who goes on to claim that pensions investing with his fund “don’t pit capital against their existing investment in a GIP II or IFM”.
With reference to the current P3 pipeline in the US DePonte, however, is skeptical about focusing exclusively on America.
“You have 50 states looking at P3s in totally different ways,” DePonte says. “You have instances of people putting a bid out on a P3 or reneging on it or not picking up the contract over a political fight about whether infrastructure should be in private hands.”
Speaking about fundraising, DePonte is steadfast that the figures have remained in line with his expectations.
“It doesn’t come as any news to me,” he says.