Much has been written (including by us) on the fast-growing ‘infrastructure-like’ side of the market. That is, those assets that have enough infrastructure characteristics to attract and repulse the market in equal measure.
Regardless of the more metaphysical debate about whether these assets really are infrastructure – or what GPs’ real motivations are for chasing them – ultimately, what really matters is what LPs think of them.
So we’ve decided to ask them.
In the first in a series of Q&As on the topic, we probed Jang Dong-hun, chief investment officer of Korea’s $11 billion Public Officials Benefit Association, for his thoughts on the matter. Below are his answers, edited for clarity and concision.
Q: What’s your view on so-called ‘infrastructure-like’ or ‘infrastructure-adjacent’ investments?
JDH: We don’t have a position in this area at the moment. A review process is needed deal by deal, but, basically, I think POBA is not comfortable – nor familiar – with this kind of investment. The main reason is that there are a lot of these kinds of assets and each asset might have different characteristics and side issues.
When we invest, we really care about the GP’s expertise in an area and their proven track record. I am afraid that for these new, infrastructure-like assets, there might be a very short track record, and it is too much of a niche area to invest in comfortably. That’s our main concern.
Also, when we invest, having an exit plan is very important for us. When we make investments in infrastructure, some of the life-spans can be above 20 years. However, we need to know how we are going to exit those investments – that’s important when we review possible investments.
As far as I know, the infrastructure secondary market is not that vibrant compared with traditional private equity. Normal infrastructure investments don’t have a long track record in secondary transactions, and these niche areas might not have a track record at all.
Q: Have you been offered infrastructure-like investments in the past?
JDH: Yes, in Korea we have experience with investments in crematoriums, but that didn’t go too well. We learned some lessons from that kind of niche-area investment. Almost a year ago, we got an investment proposal in motorway service areas. I asked my colleagues to review that project, but we decided not to go for it.
One of the reasons is that POBA has been in the process of building up our infrastructure investments during the past two or three years, so we have pretty much focused on our core portfolio, and we haven’t been that interested in niche areas. Maybe once we build up a core portfolio, we might be interested in some niche area with a proven track record.
Also, as a public pension, when we invest in infrastructure, we are more comfortable with publicly regulated assets, and some of the examples we discussed are not publicly regulated, so that might also be an issue deterring us.
Q: What was the main problem with the crematorium investment?
JDH: It was quite a long time ago – 10 years or so – and the main issue was the permits. We expected that [building new] crematoriums would be permitted with some kind of guideline, but [the permits] kept being postponed.
Q: When it comes to calling an investment ‘infrastructure’, what is the trade-off you are prepared to accept between an investment’s contractual characteristics and the actual underlying asset?
JDH: As of now, I think that both conditions need to be met during our internal review process. We are not willing to brand an asset as ‘infrastructure’ despite it having similar characteristics to those of traditional infrastructure assets.
Q: What kind of boxes would an infrastructure-like investment need to tick for you to be comfortable with it?
JDH: Maybe motorway services areas, for example, could be a good candidate for us to review. However, we would have to evaluate the size and the road conditions – and also the GP.
Q: What attracts you to motorway service areas?
JDH: That there’s no road that can be constructed [that might divert part of the traffic]; there should not be any alternative at all.
These days we foresee some Uber service with flying cabs. These are going to be tested in the US in 2020.
Technology is changing very fast, and technological disruption influences these niche areas more than traditional infrastructure. So, that is another consideration.
Q: Anything else you would like to add?
JDH: I think that in POBA, we are pioneers in niche areas, we are open to new investment opportunities without any prejudice, and we can review investments with an open mind. As we establish our infrastructure portfolio, we will have more experience and knowledge and know more external GPs and will be more comfortable investing in new areas.