Case closed

In May, when Blackstone announced the launch of its $40 billion permanent capital vehicle, the news was notable for more than the fund’s size. The open-ended structure, popular in Australia, has been used sparingly for US infrastructure funds.

In many ways, a shift towards open-ended structures seems overdue, particularly for core assets. While the closed-ended private equity structure is a natural fit for core-plus or value-add, it is not particularly well-aligned for long-term assets, investors say.

“When you own a water utility or some other large infrastructure asset with a very long life, why do you have a 7-to-10-year life fund?” questions Mark Canavan, senior portfolio manager for the New Mexico Educational Retirement Board. “You don’t want to be forced into a sell position, and some of these [closed-end] funds, in the way they are structured, essentially force you into a liquidity event at some point.”

Blackstone is not the first US fund manager to go down this path. JPMorgan and The Carlyle Group, for example, already have open-ended funds. But with this segment of the market underserved, logic would seem to dictate that LPs will increasingly move in this direction.

“It is only a natural evolution of the market that people would like the open-ended structure and move to it over time,” Canavan says.

So far, though, such a trend has yet to clearly materialise. Probitas Partners, a California-based placement agent, has been surveying investors in infrastructure for more than a decade and has included questions on preferred fund length.

“Because infrastructure is a longer-lived asset, you would expect to have open-ended or evergreen structures become more important,” Probitas managing director Kelly DePonte tells Infrastructure Investor. “That is what I thought in 2006, and I have sort of been beaten down year after year.”

In the latest poll, conducted in the middle of this year, just 22 percent of those surveyed said they were actively interested in open-ended infrastructure funds. By comparison, 67 percent of respondents were actively pursuing closed-ended funds.

“You might get some fluctuation from year to year, but if you look at the long-term trend, it is sideways,” DePonte says. “Now you’ve got some drift towards 12- to 15-year structures, but open-ended funds really have not come to the fore in the marketplace.”

There are a handful of possible reasons open-ended vehicles have not taken off in the US (or Europe, for that matter). While the structure is a natural fit for core, DePonte says, some of the larger LPs will skip the middle man and invest directly in these assets. Open-ended funds are also seen as yielding lower returns – according to the Probitas survey, 82 percent of investors targeted less than 10 percent net in such funds.

The most significant impediment for the structure, though, may be LPs’ comfort and familiarity with closed-end funds.
“The US market very much came to thinking about infrastructure structures coming from a private equity background,” one fund manager tells Infrastructure Investor. “They were used to going to their pension fund boards or investment committees with liquidity structures of closed end.”

In Australia, where investors had less exposure to private equity, open-ended structures were much quicker to emerge in infrastructure. Australians remain more comfortable with open-ended funds than their American counterparts.

For his part, Canavan is preparing to make his first investment in an open-ended infrastructure fund. His resistance to this point, he says, was due to management fees that were too high given the return profile.

“The fee structure was definitely holding back their ability to raise large volumes of capital,” Canavan says of open-end fund managers. Indeed, the Probitas survey showed most investors targeting management fees under 1 percent for open-ended funds. Now, Canavan says, such fees have become more reasonable.

Price may help win the structure some more proponents, but as far as the majority of North American LPs are concerned, it is case closed for open-ended funds.