Limited partners (LPs) in closed-ended funds are investors of the patient kind. Signing up to such a vehicle is to agree to the promise of a future deal pipeline: before money can effectively be deployed, investors have to cover due diligence and bid costs, mitigate the J-curve effect and hope there are not too many lousy bets among prospective assets. Building an infrastructure portfolio of six assets, managers reckon, can easily take two to three years.
So why embark on one of these arduous and costly adventures when you can actually buy in a sizeable, proven portfolio that’s available straight away? That’s the question AMP Capital asks to prospective investors in its Global Infrastructure Fund (GIF).
Last October, the Australian fund manager converted its Strategic Infrastructure Trust of Europe (SITE) from an open-ended to a closed-ended structure; it also launched GIF, a new vehicle with a global remit. Both, similar in their terms and structure, will now be investing through the same Luxemburg-registered holding company (holdco). As SITE already has about $750 million invested in six assets, the arrangement offers investors in GIF immediate exposure. Meanwhile, shares in the holdco will continuously be rebalanced as GIF starts investing its money.
AMP now hopes to raise an additional $1.25 billion from new investors to put the strategy into action. It appears the firm is off to a good start: fund of funds Pantheon has already confirmed its intention to make a sizeable commitment to GIF. The immediate diversification the vehicle offers is a major selling point of the proposition, explains Boe Pahari, head of infrastructure for Europe and the Americas at the firm. “What we have here is a unique proposition. That just doesn’t happen in the market place.”
And that’s only one of the fund’s selling points, he continues. The very fact that the structure is now closed-ended allows AMP to speak to a broader category of investors. “Whilst the open-ended fund did have traction with some clients the majority of them still preferred closed-ended funds. This was particularly the case in Asia and the US, not to mention Europe.”
Did the same hold true for existing LPs? “We have investors from Australia, Japan and Europe who like open-ended funds. We told them that, to provide them with the diversification we promised, we needed to mobilise funds to bring in more assets.” That required switching to a closed-ended structure, he says, a strategy that has since received “overwhelming” support from the firm’s LPs.
The main pull of closed-ended structures, Pahari elaborates, is their ability to guarantee a sounder alignment of interests between LPs. “As an investor, I don’t want someone to come in later and take some of my value; I don’t want someone to leave and leave me with the risk.” Alignment is also stronger between LPs and their fund manager in the closed-ended case, as these arrangements allow investors to pay carried interest only after they get repaid themselves – rather than on an unrealised basis as typically happens with open-ended funds.
He notes that, while awareness of open-ended structures is growing, a number of firms managing such vehicles are currently contemplating a switch. “The momentum largely remains behind closed-ended funds.” AMP is aiming to reach a final close on GIF, which has a five-year investment period and a 10-year lifespan (with the possibility for two successive one-year extensions), at the end of next year.
Pahari reckons the strongest challenges remain on the deal front. “The market is much more crowded in terms of participants than it was 10 years ago.” Being backed by one of the largest infrastructure asset managers in the world, with a 15.4 percent IRR track record over the last 25 years for this type of brownfield strategy, GIF is well placed to handle the complexity that comes with trying to craft deals outside of the auction circuit, he argues.
It will likely help that OECD markets are bouncing back. “GDP linkage is less a dirty word than it was in the past, though you need to balance it with safer types of assets,” he says. “The kind of portfolio we’ve got allows us to use it as an anchor and then look at opportunities ranging from core to core plus assets.”