A recent comment made to Infrastructure Investor by a placement agent (unconnected with anyone quoted below) says much about the apparent paradox at the heart of infrastructure fundraising today: “Our door should be being beaten down by investors wanting to get into funds – but it’s not,” he said, sounding puzzled. “It’s hard yakka on the fundraising trail.”
Arguably, not too many conclusions should be drawn from the first-quarter 2014 global fundraising figures referred to below right on the basis that it’s too short a timeframe. Nonetheless, a paltry nine funds closing on an aggregate $7.3 billion can’t help but catch the eye given that the average number of funds closing in a quarter since 2010 has been consistently above 15 and last year’s total amount collected was more than $47 billion.
Looking at the forward calendar of likely fund closings, there are none of the blockbusters that have been seen in recent years such as Global Infrastructure Partners ($8.25 billion) or Brookfield Asset Management ($7.0 billion) on the horizon. Indeed, one observer we spoke to described the fundraising environment for some time ahead as looking “light and sparse”.
Kelly DePonte, a partner at US placement agent Probitas Partners, confirms that – according to his own firm’s figures – first-quarter fundraising was “way off” the figure recorded at the same time last year and adds that “there has not been a big turnaround in April”.
So, rather than representing a mere blip, could the first-quarter figures after all be a worrying sign of malaise?
For those like the placement agent in the opening paragraph, there certainly shouldn’t be any cause for concern. After all, there is a wall of capital that can’t find a home in domestic markets and needs to be deployed overseas. This capital resides in countries such as Canada, Australia, the Nordic countries and increasingly emerging markets as well – and is frequently referred to as “mobile capital” when it heads overseas in search of opportunities.
This mobile capital – plenty of it being deployed in infrastructure as a way of avoiding desperately low government bond returns – tends to make a beeline for the latest auction process and is helping to boost prices paid for core infrastructure assets in places like Western Europe and Australia (sometimes to eye-watering levels).
James Wardlaw, a partner and head of the infrastructure practice at placement agent Campbell Lutyens, speaks of “LP [limited partner] firepower” and says that “no LP I know of is trying to reduce their exposure to infrastructure”.
So why are funds not being overwhelmed by demand? Many would say that at least in part it’s due to firms having quite a legitimate aspiration to invest directly or co-invest, or basically find any way of getting into infrastructure without paying a high level of fees. More and more institutional investors clearly now feel confident enough to invest in infrastructure directly without the need for intermediation (perhaps having dipped a toe in the water first by backing fund vehicles).
“There is a strong belief that [institutions] can do it in-house, which I think involves a misperception of the complexities of the asset class and it certainly doesn’t work for all,” cautions Stefan Hepp, founder and chief executive officer of SCM, a Swiss firm which advises institutional investors on allocations to private market investments. “But it may be a valid approach for those large pensions and sovereign wealth funds which can attract seasoned professionals and have the deep pockets to execute a direct investment programme that has a strategic focus and leverages their access to deal flow.”
HOTBEDS OF COMPETITION
Certainly, some of the largest deals recently have been hotbeds of competition for direct investors. For example, the winning bid team for the A$7.1 billion (€4.8 billion; $6.6 billion) acquisition of Queensland Motorways comprised toll road operator Transurban, pension fund Australian Super and a subsidiary of sovereign wealth fund the Abu Dhabi Investment Authority.
While funds are certainly not being marginalised entirely from these larger deals – witness Hastings Funds Management’s successful A$1.75 billion bid for Port of Newcastle alongside Chinese state-owned enterprise China Merchants, for example – there is certainly evidence that they are being squeezed to some degree by ever more dominant and powerful direct investors.
The battleground between fund and direct investment can be clearly seen in Australia, where the likes of Future Fund and Australian Super have become direct investors of considerable heft. There is currently much interest in how many more of Australia’s numerous pension funds – representing A$1.4 trillion in assets under management – will be tempted to go the direct route.
Scott Davies, global head of infrastructure at Sydney-based fund manager AMP Capital, is not pessimistic when it comes to the future of fundraising. “There is a lot of capital in global pension funds looking for deployment and a significant amount of that will go into traditional [infrastructure] funds,” he predicts.
Be that as it may, AMP Capital happens to be at the forefront of an emerging trend which some think represents the future of infrastructure fundraising – and that trend is emerging not from Sydney or Melbourne but the likes of Beijing and Tokyo. In Asian markets such as China and Japan – where huge pension and insurance pools reside – there is strong interest in infrastructure, but not yet sufficient experience to countenance investing directly.
In September last year, AMP Capital launched a funds management joint venture with China Life Asset Management Company, a subsidiary of insurance giant China Life with more than A$345 billion in assets under management. Furthermore, China Life recently made a commitment (for an unspecified amount) to AMP Capital’s Infrastructure Debt Fund II, which announced in April this year that it had reached $750 million on its way to a $1 billion target.
Indeed, China Life is proving to be something of a fund pioneer. In November 2012, the firm partnered with the government of Suzhou to launch the Suzhou Urban Development Fund, which was reported to be the first private infrastructure fund in China to be backed by a domestic insurer.
“There is significant capital raising in Japan and China,” confirms Davies. “The return on bonds has been driven down and people are re-allocating away from traditional asset classes to infrastructure as it offers better value for money in terms of yield and capital growth.”
He adds: “That trend is no different in Asia to the rest of the world. What’s different is that developed markets have evolved to the point where there’s a debate over who will go direct. In Asia, going direct remains a real rarity.”
“Institutions in countries such as Japan and Korea recognise that they don’t have the ability to go direct and can’t do infrastructure in-house,” says Wardlaw. “So I think they do see the merits of funds. This could be a significant development because there are concentrated pools of capital in Asia, but as yet it’s quite nascent.”
In the long run, these large pools of capital in Asia could prove the salvation of the infrastructure fundraising market. But with many yet to commit capital in meaningful amounts, the onus for the time being is on funds persuading investors that they are operating in profitable niches. Aside from US energy, which DePonte describes as a “hot sector right now” – there are few obvious homes for the money.
One source canvassed by Infrastructure Investor pointed to I Squared Capital, the New York-based fund manager which had raised $800 million for its debut fund by February this year, as an example of a niche approach described as “expansionary capex” involving the integration of platform assets and then deploying increasing amounts of capital into these assets backed by a strong operational approach. “It resonates with investors and it [is the kind of strategy that] avoids a cost of capital shootout,” said the source.
In the ‘hard yakka’ of today’s fundraising market, having some kind of unique selling point will help you grab investor attention. The bright lights of Asia’s capital cities beckon, but they provide no immediate panacea.