“Positive momentum against a backdrop of calamity”. That’s how Christopher Beale, managing partner at New York-based fund manager Alinda Capital Partners, describes the contrast between his firm’s $4 billion fundraising campaign and the global economic meltdown that was its almost-constant companion.
When Alinda announced a $1 billion first close for its second fund in July 2008, it was hardly headline-making news. After all, the firm had raised a $3 billion debut fund and had a $5 billion cap for its successor. At first close, it had passed muster – no more or less. And then, two months later, came the bankruptcy of Lehman Brothers – and the infrastructure fundraising market went into hibernation.
And yet, far from falling into a slumber, the Alinda fundraising motored ahead. In defiance of the headwinds, it collected around $2.5 billion from LPs during the course of 2009 – around a quarter of the total amount raised by infrastructure funds globally during the year, according to figures from placement agent Probitas Partners (see accompanying chart).
A further $500 million collected in the early stages of 2010 was enough to bring the total to $4 billion, some way short of the hard cap but still a fairly remarkable effort given the fact that few other ‘post-apocalypse’ infrastructure fundraising efforts have dared cast their gaze any higher than $1 billion.
Beale is quick to point out that, beneath the serene progress implied by these numbers, the fundraising effort at no point felt straightforward. “It was a very difficult market environment,” he reflects. “Some institutional investors with partially filled allocations to infrastructure found that they had no headroom to make new investments after the total value of their portfolios fell due to the stock and bond market declines – the denominator effect. In addition, the uncertainty created by the financial crisis caused a lot of institutions to put things on hold and reassess what they should be doing. Quite a few were not making commitments to any asset category.”
Reflecting on how Alinda was able to go against the grain of market conditions, Beale says: “We didn’t change our product or approach for our second fund. Our investment product is designed to offer steady, inflation-protected returns that are not correlated to the stock market or the bond market. Our first fund’s portfolio has achieved that to date, weathering the financial crisis very nicely. We may be boring, but boring is exciting when other investment categories are gyrating wildly”.
On a positive note, he adds, “While many investors were sidelined, interest in infrastructure has been steadily increasing among large pension funds in the US and Europe”.
He also believes, however, that the admired fundamentals of infrastructure investing had been forgotten by some of Alinda’s rivals during the boom years – enabling the firm to look good by comparison. He says Alinda declined to participate in auctions were prices were inflated. “In 2007 there was a bubble, especially in ports,” he recalls. “Some very high prices were being paid, and some buyers were taking on too much debt. The unusually severe recession hit ports hard. They were shown to be much more GDP-dependent than anyone had expected. So the steadiness wasn’t demonstrated. Infrastructure isn’t an investment category where you can make transformational changes the way you would like to do in private equity. So, if you pay too much in infrastructure, it’s very difficult to make up the returns later”.
He continues: “You may have competition you didn’t expect and be more subject to industry cycles and GDP than the risk profile you originally presented to investors. If all of a sudden it turns out you’re hugely GDP-dependent, then you’ve not selected the right asset. It’s not an investment category where you can make transformational changes like you can in the buyout industry and produce upside volatility. If you pay too much in infrastructure, it’s very difficult to make up the difference later.”
He continues. “The unusually severe recession exposed big differences in the performance of GPs’ portfolios. Infrastructure is a relatively young asset category and the downturn’s effect on infrastructure portfolios provided a laboratory experiment for investors. LPs didn’t have to wait 10 years to judge relative performance”.
Aside from being an adherent to investing fundamentals, Beale cites two other reasons for the support the fundraising elicited: experience and independence. On the former point, take a look at the company’s website and you’ll find that Beale and the firm’s four partners – Philip Dyk, Sanjay Khettry, John Laxmi and Simon Riggall – all individually claim more than 20 years’ experience of infrastructure. Four of the five – Dyk being the only exception – had spells working in project finance at Citigroup.
While many of the infrastructure funds launched in the last few years have been sponsored by banks, Beale says his firm stood out as one of the few independent managers in infrastructure. “The market has shown that the independent model is what it prefers,” says Beale. “It is clear that most investors prefer independent GPs with a single focus. That’s the key reason why we’ve been successful, that and our track record”.
One placement agent that was not involved in the Alinda fundraising believes another quality was key, namely persistence. This source says: “They were a fund II in a market sector with many first-time funds and they managed to get a significant closing done before the market collapsed in September 2008. I’m not sure what the story might have been if they had come to market six months later, but they certainly stuck with it and ploughed ahead.”
Maybe not a glowing endorsement, but recognition that many in the market share – however grudgingly. From a dog’s dinner of a fundraising market, Alinda conjured an offering that many investors found appetising.
The April issue of InfrastructureInvestor will include an in-depth keynote interview with Christopher Beale.