Why is infra not making more of the permanent capital boom?

Brookfield and GIP’s latest funds can hang comfortably with PE’s big boys. But despite infra’s long-term credentials, it’s PE firms that are amassing the largest amounts of perpetual capital.

Last week, Brookfield closed its fourth unlisted infrastructure fund on $20 billion. The close was significant for a number of reasons. For Brookfield, it was the biggest vehicle it’s raised across the asset classes it operates in. It was also the second-largest infrastructure fund ever raised, hot on the heels of Global Infrastructure Partners$22 billion whopper. And it’s almost certainly going to be the largest infrastructure vehicle closed this year.

This is great news for the asset class, which recorded its second-biggest year for accumulating capital in 2019, with unlisted fundraising topping $97 billion. That’s a speck in the eye of unlisted private equity fundraising, which smashed records to amass more than $537 billion last year. But what’s interesting about the Brookfield and GIP closes is how comfortably they can hang with PE’s big boys. After all, 2019’s biggest PE funds – Blackstone Capital Partners VIII and Advent International GPE IX – raised $26.2 billion and $17.5 billion, respectively.

And why wouldn’t they? As Brookfield infrastructure boss Sam Pollock told us, the 170 LPs that committed to its strategy like the asset class for its “lack of volatility”. They also like that they can “earn a total return that’s well in excess of what they’d ever achieve on fixed income investments, and in most cases their other equity [investments] over a long period of time”.

The numbers back that up. Brookfield’s infrastructure funds, for example, are generating an average yield of 4-6 percent and gross returns of between 14 and 20 percent. As of 31 March 2019, GIP’s first three funds were generating average yields of between 5 and 12 percent, with net IRRs varying between 10 and 21 percent.

So far, so competitive. But what’s particularly interesting about infrastructure – given the long lives of its assets and its obvious liability-matching potential – is that it is not capitalising more on the permanent capital boom being seized by traditional private equity firms.

Shortly before Brookfield announced its fund closing, the Financial Times reported that PE titans Blackstone and Apollo have amassed a $250 billion permanent capital war chest. The FT estimates about one-fifth of Blackstone’s total assets are now perpetual capital, with the latter accounting for half of Apollo’s AUM. That’s impressive, and even prompted a little internal debate at PEI about when a PE firm stops being a PE firm.

No such considerations would apply to infrastructure firms, though. As JMP Securities analyst Devin Ryan – correctly – told the FT, open-ended funds are especially suited to long-lived assets such as infrastructure and property.

Yet the vast majority of vehicles raised in the asset class continue to stubbornly be in the 10- to 12-year range, with Brookfield and GIP’s latest flagships as prime examples of that. The only new permanent capital vehicle of scale to emerge of late was – get ready for it – Blackstone’s $40 billion open-ended infrastructure fund, which raised $14 billion during its initial fundraising stage last year.

Even long-dated vehicles in the 20-year range are not exactly a dime a dozen, though a few new ones, like Macquarie’s super-core fund, have popped up of late. Still, a recent anecdotal chat with a manager raising a long-dated vehicle highlighted how that structure has slowed down fundraising, with LPs taking some convincing, despite the liquidity events built into it.

On the non-anecdotal side, our LP Perspectives 2020 survey, which polled 146 institutional investors, showed that 41 percent of LPs investing in the asset class prefer unlisted, closed-ended structures, with 20 percent favouring open-ended ones. A tantalising 39 percent, however, could go either way.

The open-versus-closed debate is not new and, in many ways, can seem somewhat academic. After all, the status quo seems to be working well enough, so if it ain’t broke…

Then again, when you have an asset class relentlessly marketed as long term – and there’s obvious appetite for permanent structures out there – it’s not unreasonable to ask why it’s repeatedly pursued through short-term ones.

Write to the author at bruno.a@peimedia.com

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