It was the pioneering model that time seemingly forgot. In the infrastructure investment market’s youth came the open-end vehicles of IFM Investors’ Global Infrastructure Fund in 2004 and the JPMorgan-advised Infrastructure Investments Fund in 2006, which have now amassed about $50 billion and $20 billion, respectively.
What happened next? The model didn’t quite fall away, but it was certainly a niche market element. Several strategies were launched but were much smaller in size or had a much narrower investment lens. It wasn’t until 2017, when Blackstone came to market with its open-end Blackstone Infrastructure Partners vehicle, which now has a war chest of over $31 billion, followed in 2018 by the now $8.1 billion Brookfield Super-Core Infrastructure Partners, that the structure became a mainstay of the market – one favoured by large GPs.
Now, in the past 18 months, $55 billion of permanent capital has been raised, accounting for 39 percent of all such equity fundraising since inception, per data from consultancy bfinance. In 2018, there were 20 open-end equity funds active in the market. A further 20 were launched as at 31 October 2022.
At the top end of the market, seven of the top 10 GPs in our Infrastructure Investor 100 ranking now manage perpetual capital vehicles. Yet LPs are not tremendously swayed, it seems. A survey of LPs by placement agent Probitas Partners last summer indicated that 36 percent had no preference as to whether funds were open- or closed-end, with another 36 percent preferring the standard 10-year private equity fund structure that propelled the infrastructure market in the mid-2000s.
“There is always international diversification of our investor interest so if one geography comes into a point of pain, there’s others which are eager to come and step in”
Ryan Weldon, a portfolio manager and associate director at IFM Investors, points to a historical narrative leading to the growth the structure has experienced, which highlights the perceived liquidity element of open-end funds.
“After the GFC, a lot of investors came back to the market trying to find where they might be able to put money to work outside of equities and bonds,” he says.
“A 10-11 year bull market run allowed people to play around with diversification, and supply starting coming online. What drove that was the desire to have access to some of these more illiquid products but the [perceived] belief of instant liquidity [offered by open-end funds]. As that built out, supply continued to pour in.”
Weldon’s colleague, executive director Mandeep Mundae, provides the more sector-specific reason why such vehicles are on the rise. “Infrastructure is slightly different to other asset classes, and investors realised this model makes more sense as they’ve become more educated,” he says.
The power of redemption
In today’s climate, with investors’ pockets under strain and the denominator effect taking hold, open-end funds will come under the spotlight with regard to redemptions. Any LP looking to restructure its private markets portfolio may well look at redeeming its position within an open-end fund as a faster way to help with the balance.
Indeed, sources have told Infrastructure Investor that one of the market’s larger open-end funds saw a wave of redemptions worth about $500 million last year, mostly from the UK amid a massive sell-off of gilts last autumn.
“We have noticed a tick up in redemptions at open-end funds since autumn 2022, which will likely continue into 2023,” says Anish Butani, bfinance’s senior director of private markets. “The whole concept of liquidity is predicated on the fact other investors will keep ploughing in, whether it’s subscribing to an open-ended fund or interested in purchasing a secondary position of a closed-ended fund.”
At IFM, the GIF is somewhat protected from this risk as a result of the investor queue – the time it takes for a new investor’s commitment to be called – which stands at 12-18 months and “which is longer than some other open-end fund options”, according to a memo from consultant Meketa in September to the Connecticut Retirement Plans and Trust Funds. CRPTF invested $100 million into GIF following Meketa’s recommendation, topping up a previous $200 million investment.
“Over the last year, we had a couple of large redemptions come from specific geographical locations,” reveals Weldon. “Liquidity is a commodity and a finite one at its best. The benefit of the structure of the IFM fund is we do have that capital queue. There is always international diversification of our investor interest so if one geography comes into a point of pain, there’s others which are eager to come and step in. It really helps us traverse these difficult markets.”
As a group owned by Australian superannuation funds, IFM also had to deal with the avalanche of redemptions in 2020, when the Australian government allowed the country to withdraw money early from pension plans in a bid to help those suffering liquidity issues at the onset of the pandemic.
“In that instance, we worked very closely with all our investors, had the conversations of where the liquidity should have come from and we were able to get through this period of investors being caught offside and still having demand for our product,” Weldon explains.
While hardly desired, some embrace the ability to redeem, as seen at Commerz Real. The German asset manager last month said its open-end, renewables-focused klimaVest fund had reached €1 billion in commitments, a little over 24 months after its launch in November 2020.
“We wanted to have a fund where investors have the possibility to redeem their shares on a daily basis. That construct, combined with an impact fund, is a major point which made it popular,” says Timo Werner, fund manager at Commerz Real.
New investors still have to wait between one and two years to redeem in klimaVest, in what Werner says is an attempt to replicate the German real estate model, while most open-end funds have typical lock-up periods of between two to four years for new investors.
“We wanted to have a fund where investors have the possibility to redeem their shares on a daily basis. That construct, combined with an impact fund, is a major point which made [klimaVest] popular”
Those lock-ups, aside from providing open-end funds with a degree of stability, are also an encouragement to investors to apply a long-term lens to long-term funds. But judging an evergreen fund is a more complex proposition than a closed-end vehicle with a finite life.
Some investors expressed concern, telling Infrastructure Investor that with the continued addition of assets to open-end portfolios and the perpetual structure, there is rarely a good time to take stock. As one posited, by the time stock is taken, the initial investment may well have diminished.
“After 10 years, there’s no hiding,” adds another source, who believes that’s when performance starts to crystalise and managers can be evaluated properly.
That, of course, is not a universal school of thought, with some managers suggesting a shorter timeframe.
“You need to have three to five years of returns,” says Weldon. “There’s been a lot more volatility since March 2020, but you’re taking in a very narrow pocket. To smooth that out, you need to extend that to three to five years, maybe even a little longer, as that’s the only way you’ll be able to judge an illiquid product on its returns.”
“We suggest to our investors to stay at least five years with the fund so they receive every year the yield target of 4 percent,” adds Werner.
Given that open-end funds typically target core infrastructure, many tend to judge performance on the yield Werner mentions, although older products such as IFM and JPMorgan have typically trumpeted the 8-12 percent targeted IRRs as much as the cash yields.
“As the open-ended fund universe has expanded, it is interesting to see a range of a performance fee models emerge,” Butani says. “Older funds have tended to apply a hurdle-based performance fee based on movements in Net Asset Value, while in recent years there has been a noticeable emergence of yield-based incentive structures that involve GPs sharing a portion of the yield. Another trend amongst some of the newer players is a ‘hybrid’ performance fee model that is linked to valuations and yield. It will be interesting to see how investors react to more yield-driven performance fee structures given the recent shift in the fixed income market.”
There may also be less measurable but equally important factors in judging the performance of an open-end vehicle. “There are clearly traditional financial metrics of risk and return that an asset allocator measures at a fund – but also individual asset-level. What you tend to want to see is low volatility and consistent performance across different assets in the open-end pool,” explains Luba Nikulina, chief strategy officer at IFM.
A noticeable trend has been the emergence of open-end funds dedicated to the energy transition. In fact, energy transition-focused open-end funds have attracted 11 new entrants since 2017, according to bfinance. Some have questioned the significance of this development, seeing in it merely a scaled-down reflection of similar trends observed in the closed-end fund market.
For Werner, whose klimaVest fund is one such new entrant, the open-end approach is more appropriate given the types of power-purchase agreements it enters into or the regulatory regimes the assets operate under.
IFM is another new entrant, complementing the GIF with the launch last year of the IFM Net Zero Infrastructure Fund. For Mundae, who is focused on energy at the firm, there’s a clear link.
“If you think about the requirements for energy transition, there’s a complex, whole series of different requirements,” argues Mundae. “There’s renewables and storage, but then you also have hydrogen and carbon capture and areas that are further down the track and aren’t quite ready for now. If you want to successfully be in the energy transition, you’ve got to be across that whole spectrum. It therefore makes sense to be in an open-ended structure so you can be across the sectors as they come online. These aren’t short-lived assets.”
As both the oldest open-end fund manager in the business and, in a way, the newest, has it been a revolution for the model or an evolution?
“There’s definitely been some learnings along the way,” Mundae responds. “There have been improvements on the reporting and structuring, but they’re not material step changes in how we look at open-end funds.”