Tough going is the new normal

Fund valuations are rising, deals are returning and limiting partners are opening their wallets again, but not as much as they used to. This means raising capital for infrastructure will remain hard, hard work for the foreseeable future.

Remember the good old days when you could just fly up to, say, Juneau, Alaska and make a $250 million or a $500 million leap in your fundraising by knocking on the doors of the Alaska Permanent Fund Corporation?

Those days are gone.

These days, even as fund valuations are rising, deals are returning and limited partners are again beginning to make commitments to infrastructure funds, it’s increasingly clear that there’s a new normal in place when it comes to fundraising.

Witness an August memo from pension consultant Ennis Knupp to Dan Allen, chief investment officer of the $12 billion State Universities Retirement System of Illinois. Knupp points out that they finally have a list of six semi-finalists for the retirement system’s infrastructure manager search: Alinda Infrastructure Fund II, Brookfield Americas Infrastructure Fund, JPMorgan Infrastructure Investment Fund, KKR Global Infrastructure Investors, Macquarie Infrastructure Partners II and the UBS International Infrastructure Fund.

No surprise there; manager searches are often a kind of beauty contest to see who will ultimately get a pension’s commitment. Slightly more surprising? Knupp whittled down this list from an original 30 respondents – all vying for a 1 percent infrastructure allocation from the retirement system. The other 24 were eliminated based on sector experience, use of third-party placement agents, performance, management, structure, strategy, and terms, according to the memo.

Eventually, the pension gave $40 million each to Alinda Infrastructure Fund II, targeting $3 billion, and Macquarie Infrastructure Partners II, targeting $4 billion.

Contrast that with the good old days when Alinda could knock on Alaska Permanent’s doors and get a $250 million commitment and it becomes increasingly clear that 30 managers vying for a $40 million commitment is the new normal. There are so many funds in the market thirsty for capital that as soon as an infrastructure manager search opens up at a pension, no matter how small the potential commitment, the competition lines up like in episode one of “America’s Next Top Model”.

But in February, Alaska cancelled its $250 million commitment to Alinda amidst a larger portfolio shake-up. And the large $500 million commitment Goldman Sachs Infrastructure Partners II (one of the 24 eliminated from Knupp’s list in Illinois) received from the pension is more likely than not a thing of the past.

So even as things are looking up for 2010 on the economic and deal-making fronts, it would be wise for managers to remember that fundraising’s likely to occupy a large part of their time in the coming year. Prepare to work harder and longer for smaller commitments going forward.