As the end of the year approaches, it’s time to take stock of what lies ahead. But if we had to choose one piece of advice to impart to all infrastructure investors going into 2016, it’s this: forget business as usual.
That message came through loud and clear from our recent European fund management roundtable, starting on page 38, which gathered some of the biggest names in the industry, including Antin Infrastructure Partners, Ardian, First State Investments, Infracapital, InfraVia and Threadmark.
For example, pretty much everyone who has been paying attention to the European market in recent years will know that the auction-driven, large-cap end of the market is now the playground of very large institutional investors investing directly. The latter, driven by much lower funding costs, have largely muscled out GPs, who cannot conscientiously stomach the return compression in the space.
What you might be less familiar with, though, is that some of that return compression is now finding its way down into the mid-market, albeit for different reasons. “We are seeing managers with a reasonably cheap cost of capital – people who set up managed accounts, or captive infrastructure managers – enter the mid-market. So some traditional barriers to entry, like size of transaction and long lead-up times, are no longer stopping some managers from underwriting a €100 million investment at 8 percent”, commented InfraVia partner Bruno Candès.
It’s also worth bearing in mind that those alternative structures are here to stay, warned Threadmark partner Bruce Chapman: “We are seeing a trend and we are in discussions with large construction groups that would’ve previously sold assets to funds or into the market and which are now looking into somehow organising capital around themselves. Globalvia is a good early example of that. But we are seeing a different range of options, including construction groups setting up their own fund management arms, or construction groups forming joint ventures with fund managers”.
Our recent Infrastructure Investor LP Summit, held in New York, revealed some other interesting trends. Let’s start with the good news, for GPs at least. In a discussion involving LPs with some $350 billion of assets under management, some very large direct investors made a somewhat refreshing admission: they are increasingly finding themselves using funds again.
They use them mostly in two types of scenarios. Firstly, to access new geographies where they don’t have the required expertise to invest in. Secondly, and perhaps more interestingly, to access certain types of big-ticket co-investments. Perhaps these LPs got tired of seeing choice assets getting scooped up by the likes of Brookfield or Global Infrastructure Partners – or indeed of having to reward them handsomely for doing the scooping on their behalf. But mostly, the investors that made this admission just seemed covetous of the benefits being reaped by those other LPs that have committed to large-scale funds with attached co-investment programmes.
Finally, a word on sovereign wealth funds (SWF). On page 17, we write that SWFs needn’t always be seen as competitors. Sometimes they can be partners to other big, non-sovereign LPs. Other times, they can be prized clients for the managers that entice them with the right structures. They are also, as Malaysia’s 1MDB shows, sellers of assets, although 1MDB is selling out of distress.
But there is another reason why SWFs will be selling assets in this market. Unlike pensions and insurers, SWFs aren’t driven by liability-matching or a search for yield. They are mostly driven, as we heard from a renowned SWF at our event, by a hunt for good returns. Which means many of them will be looking at their infrastructure portfolios with an eye to divesting assets in the current market.
All of which drives home our opening statement: going into 2016, it won’t be business as usual. We are not telling you to tear-up the rulebook completely. Just treat it more like a rough guide and less like a sacred text.