The infrastructure investment world used to be fairly simple. As limited partners tiptoed into the asset class, they would go into funds, which were often very much private equity-like. The largest investors would then learn enough to graduate to direct investing, perhaps after a co-investment stop-over. Some would find it too tedious and go back to managed vehicles. If you want an image, this back-and-forth could be described as a pendulum swinging.
If a pendulum there ever was, it’s not clear where it’s swinging to now. As we heard last month at our Berlin Global Summit, “the fund model is thriving” at a time when direct investors are also snapping up some of the asset class’s most prized deals. Further complicating the picture, a third way seems to have emerged: the platform. Already a buzzword in tech circles, platforms have become fashionable in infrastructure of late. But investors should bear several caveats in mind if they are to successfully bank on the concept.
For a start, as both Aquila Capital’s Oldrik Verloop and InfraRed Capital Partners’ James Hall-Smith observed at our Renewable Energy Forum, also in Berlin, “platforms mean different things to different people”. For fund managers, they are companies established with seed assets and grown incrementally through bolt-on acquisitions. But even in this case, their purpose varies: while some firms build them in association with developers to develop greenfield projects, others use them as yield-focused vehicles running operating assets, sometimes acquired from another fund the GP manages.
For LPs interested in going direct, they can signify a different thing. “Platforms for us mean partnerships – with fund managers, management teams or strategics,” Jonathan Ord, investment manager at the Local Pensions Partnership, also said last month. He cited the example of GLIL, a partnership between the Greater Manchester Pension Fund and the London Pensions Fund Authority, which made its debut investment in 2015 into a £500 million ($624 million; €578 million) portfolio of UK bioenergy projects.
The attractiveness of these structures is clear. For a GP, launching platforms to target projects allows for a reduction in complexity, as the latter are subsequently acquired at the company level rather than through a myriad of special purpose vehicles. Transaction fees are reduced and IT and operational benchmarks can be shared. Platforms focused on operating assets can be listed, providing investors less familiar with infrastructure with liquidity and dividends. LP-led platforms allow for a poolling of cash and resources that makes it easier to go direct.
Yet in all these cases, platforms require a fair amount of work. When LPs team up to target an area of the market, they do so after an extensive period of research – to determine the sector they see as attractive and find capable management teams. GP-led platforms focused on development grow through the acquisition of multiple projects of modest size, implying painstaking due diligence and boots on the ground. Yieldco-like platforms can expose their manager to legitimate questions about conflicts of interests: when a platform buys a project from a sister fund, how should the asset be valued? Even if most managers are willing to be transparent, such transfers require LPs to scrutinise fund transactions in a lot more detail, thereby possibly diverting precious resources.
Platforms are a means to several ends and they can be innovative structures to achieve them. But they are not shortcuts for LPs seeking infrastructure exposure. As with most other structures, investors need to ask the right questions to make the most of them.