Why investors like olive(1)

Limited partner appetite is for something in between greenfield and brownfield.

What do you get if you mix green and brown? Online opinion appears to be divided on the matter, with unappealing responses including “dark green”, “dirty green”, or simply “a mess”. There was one imaginative offering that caught our eye, however: “Olive”.

So, entirely of our own making, we would like to introduce you to the hottest new investment category in infrastructure: “Olivefield”. Ok, we realise it’s not likely to catch on.

In the most recent version of its Infrastructure Institutional Investor Trends survey for 2015, placement agent Probitas Partners highlighted a continuing trend to investing directly in core brownfield assets, while any commitment to a core brownfield fund comes with enormous pressure on fees and carry.

The survey found that 85 percent of investors expect management fees for core brownfield funds to be 1.25 percent or less, while 95 percent expect carried interest to be 15 percent or less – “noticeably lower” figures than in last year’s equivalent survey.

In many cases, investors feel (rightly or wrongly) that they can do brownfield investments at least as well as any fund manager. Given that the same clearly does not apply to greenfield strategies, should that be where institutional capital is gravitating? The survey offers a resounding answer in the negative, with pure greenfield funds accounting for a mere four percent of the overall fundraising total last year.

At this stage, investors – most of whom still have not had exposure to infrastructure over a long period – appear loath to take on all the associated risks of early-stage projects. As a consequence, almost half of investor capital commitments (42 percent) were heading into brownfield funds in 2014.

If this appears to contradict the earlier assertion about increasing scepticism towards core brownfield strategies, the key to understanding the figures appears to lie in “value-add” brownfield – or brownfield with a bit of extra risk attached (but not too much).

This is the survey’s description of such funds, which appear to be greatly increasing in popularity: “These funds, though invested in assets that are currently generating significant cash flow, are focused on assets that need to be rehabilitated in some way, either addressing operational or structural issues or funding expansion.”

Kelly Deponte, a managing director at Probitas, says examples of ‘value add’ or ‘rehabilitating’ brownfield may include a bridge requiring maintenance or a motorway needing new lanes to be built. These are situations where there is a core underlying asset but something needs to be done to that asset and the investor recognises that it needs a fund manager’s expertise to do it.

Somewhere between an investor’s unwillingness to pay for something it thinks it can do itself and an investor’s unwillingness to expose itself to risks that it can’t quite understand, lies today’s most popular investment category – in a fetching shade known as olive.