Nice words, smiles and handshakes can all express the confidence people place in those who look after them. But in the case of investors, trust can hardly be more meaningfully conveyed than through signing a cheque. By this measure, the custodians of institutional money have earned more than brownie points of late: about $73.2 billion has been raised since the beginning of 2014, including $18.3 billion so far this year. Yet with fewer funds closed during the period than in 2011 alone – when only $27.1 billion was collected – the market is looking increasingly concentrated. Below we take a look at what it takes to be popular in today’s polarised climate.
HERMES: BONUS OF THE UK FOCUS
Hermes Infrastructure (HIF), the infrastructure investment arm of UK asset manager Hermes Investment Management, closed its Infrastructure Fund (HIF) on more than £1.0 billion (€1.4 billion; $1.6 billion) last month. Together with related accounts, the fund manager collected a total of £1.16 billion. It had an original target of £800 million for the vehicle.
The distinctive appeal of Hermes’ strategy doesn’t seem to have lied so much in its sector focus. Rather, according to Peter Hofbauer, head of Hermes Infrastructure, it owes a lot to the firm’s location and target geography: he says HIF is “one of the only UK-based and UK-focused direct investors”, looking for “long-term stable, inflation linked infrastructure investments” for its clients.
That seems to have convinced many European corporate and UK local government pension funds, which represent 90 percent of the vehicle’s 18-strong investor base. It must also have helped that Hermes recently partnered with global investors to seal high-profile deals: the firm teamed up with La Caisse de dépôt et placement du Québec to buy a 40 percent stake in high-speed rail operator Eurostar for up to £585.1 million in March, and announced its intention to acquire a 30 percent interest in Associated British Ports for £1.6 billion jointly with Canada Pension Plan Investment Board later the same month.
ICON: KEEP CALM AND CARRY ON
It’s easy to see how the senior management of London-based iCON Infrastructure could have gone overboard. The firm’s third fund last month reached its hard cap of €800 million, a cut above its €600 million original target and well beyond the €500 million garnered by its predecessor. That was achieved thanks to a 100 percent re-up rate and a level of demand market sources place at €1.6 billion.
But the team stated its intent to stay disciplined, sticking to its original ambitions and strategy. Paul Malan, a senior partner at the firm, says that continuity and clarity were key in further cementing its following among investors, which insiders reckon have been impressed by iCON’s ability to carve proprietary deals in an otherwise crowded core European infrastructure space.
That was demonstrated in April when the manager acquired Rothes CoRDe, the operating company for a combined heat and power plant in Scotland, and Service Terminal Rotterdam, owner and operator of a bunker fuel terminal in the Port of Rotterdam in the Netherlands. iCON also cleverly diversified its investor base, which now includes US, German and Scandinavian institutions.
FIRST RESERVE: DEEP SECTOR EXPERTISE
Industry insiders sometimes warn that having two strategies under the same roof can confuse investors. In the case of US-based First Reserve, however, an earlier focus on private equity helped identify the emergence of a new asset class early in the day. In the mid-2000s, the firm increasingly came across attractive investments that did not fit its buyout model: these had a longer time span and generated significant amounts of cash that could then be distributed through dividends.
Harnessing the two decades of expertise it already had in the energy sector, First Reserve decided to launch an infrastructure platform and closed its first fund in 2011 on $1.23 billion. The firm’s infrastructure unit, which is headed by Mark Florian, seems to have since proved the concept: its follow-on vehicle reached its $2.5 billion hard cap in June 2014. The second fund’s LP base include both existing and new limited partners from around the globe.
The strategy’s edge is rooted both in its sector focus and broad sub-sector remit, allowing the firm to build on its energy expertise while looking at a wide array of opportunities. On top of conventional power and midstream assets, arguably closer to First Reserve’s core spot, the infrastructure team looks at renewables and “other contracted assets” – some of which it has strived to source through savvy partnerships with industry players.
I SQUARED: EYES SET ON THE MID MARKET
Not bad for a first try. In April New York-based I Squared hit the $3 billion hard cap of its maiden fund, beating its original target of $2 billion. Coming 15 months after launch, the landmark allowed the firm to close the largest first-time fund since the heights of the Financial Crisis. I Squared principal and head of investor relations Andreas Moon says the vehicle had excess demand of another $500 million beyond its hard cap.
A couple of factors explain the firm’s success. For one, its remit is limited to the mid-market, with transactions of a target size ranging between $75 million and $400 million (though the firm can also consider deals of up to $800 million by bringing in co-investors). At a time when a number of managers are raising bigger funds and moving up the deal scale, this allows I Squared to look for assets outside what Moon says are “large cost of capital auctions”.
The firm has otherwise a rather broad mandate, defined as opportunities in the energy, utilities and transport sectors in the US, Europe and selected high-growth markets. But the team, which counts 51 investment professionals, seems to have been sized in accordance with this; it also is close to markets in which it operates, thanks to offices in New York, Houston, London, Hong Kong, Singapore and Delhi.
SCOTTISH EQUITY PARTNERS: EARLY BIRD IN BUDDING FIELD
As Scottish Equity Partners’ (SEP) Gary Le Sueur would probably agree, small is beautiful and even more so when it’s about clean energy. The venture capital firm’s Environmental Capital Fund (ECF) announced it had raised £135 million last September after receiving the backing of London-based utility SSE, which initially invested £13.8 million for a significant minority stake in the vehicle. The move marks SEP’s first foray into infrastructure.
A grouping of financial investors led by secondary specialist Lexington Partners also pledged to the fund, which Le Sueur says was oversubscribed. “We believe the small-scale clean energy infrastructure market in the UK is underserved by institutional capital.” He reckons investors see the potential profitability of the sector at a time when energy efficiency is receiving much attention, just as institutions are increasingly pressured to demonstrate their ESG governance credentials.
They seem to have been convinced by SEP’s ability to source small-scale clean energy deals in the UK in areas including biomass, solar, small wind, district heating, anaerobic digestion and energy efficiency. The firm has assuaged investors’ concerns about the adequacy of in-house resources to manage the fund by bringing in two experienced professionals dedicated to the task; it also replied to questions on the sustainability of feed-in tariffs by underlining the UK government’s commitment to clean energy.