A compendium of institutional investor attitudes to the unlisted infrastructure asset class

InsIde the InfrAstructure fund Investor

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Published in February 2012 byPEISecond FloorSycamore HouseSycamore StreetLondon EC1Y 0SGUnited Kingdom

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© 2012 PEI

ISBN 978-1-908-783-02-8

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All rights reserved. No parts of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means including electronic, mechanical, photocopy, recording or otherwise, without written permission of the publisher.

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PEI editor: Anthony O’ConnorProduction editor: William Walshe

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Contents

Figures and tables ix

Preface xi

Section I: Thought leadership

Welcome to the ‘new normal’ 3By Andy Thomson, December 2011 Thomas Putter interview 3Skill sets 4Fair weather friends 5The deal that wasn’t 7

The right kind of boring 8By Chris Glynn, December 2011 Leo de Bever interview 8Flexible 9Selective 9Frustration 10

The yield machine 11By Bruno Alves, October 2011Jones Laing Infrastructure Fund 11A lean, mean yield machine 12Dangerous liaisons? 13Fundraising obstacles 14

The quest for the Holy Grail 15By Andy Thomson, October 2011 JP Morgan Infrastructure Investment Group 16Big as real estate 17False start 17Courting process 18Independent vs. sponsored 19‘It’s a cultural thing’ 19Take-off in Queensland 20

Mr Versatility 21By Bruno Alves, September 2011

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Contents

PGGM interview 22Risky regulation 23Funds neuter long-term cash flows 24

How to avoid ‘penny squeezing’ 25By Andy Thomson, July 2011First Reserve infrastructure fund 26All deals are partnerships 27

Time for GPs to get on our wavelength 27By Cezary Podkul, May 2011 Currency matters 28Emerging concerns 28Selective criteria 29Firm on fees 30

‘No wonder many funds seem to be struggling’ 31By Alexandra Atiya, March 2011

Section II: Fundraising

Gravis more than doubles fund size with new fundraise 37By Bruno Alves, December 2012

UK pension invests £20m in GIP Fund II 37By Bruno Alves, January 2012

HgCapital beats target with €542m renewable fund 38By Andy Thomson, December 2011

UK pension helps AMP debt fund to reach €284m 39By Bruno Alves, December 2011

GIP holds $3bn first close for Fund II 40By Bruno Alves, December 2011

Sale slows fundraising for AXA Fund III 41By Bruno Alves, December 2011

Panda Power raises $420m for power generation 42By Gerelyn Terzo, November 2011

Brookfield Infra raises $648m in oversubscribed offer 43By Bruno Alves, October 2011

Aquila fund posts C$105m first close 44By Chris Glynn, October 2011

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Contents

Oversubscribed, $1.2bn close for InfraRed fund 45By Bruno Alves, October 2011

Macquarie’s Africa Fund II closes on $500m 45By Bruno Alves, October 2011

Publicly listed infra fund in $345m debut 46By Chris Glynn, October 2011

Impax reaches €330m at final close 47By Andy Thomson, September 2011

Pàtria raises almost $1.2bn for Brazil infra fund 48By Andy Thomson, September 2011

AXA raises €750m for third infra fund 48By Bruno Alves, September 2011

First closing for €300m Aviva renewable fund 49By Andy Thomson, August 2011

Macquarie closes Russia fund below $1bn target 50By Bruno Alves, June 2011

Macquarie Everbright China infra fund secures $729m 51By Bruno Alves, June 2011

Westbourne raises over A$1bn to invest in infra debt 52By Bruno Alves, May 2011

RREEF raises €620m for second infra fund 53By Bruno Alves, May 2011

First State nears €500m for European infra fund 53By Cezary Podkul, May 2011

Meridiam courts EBRD as Fund II hits €500m 54By Bruno Alves, May 2011

First Reserve energy infra fund closes on $1.2bn 55By Andy Thomson, May 2011

Partners Group hits €500m hard cap for new infra vehicle 56By Bruno Alves, May 2011

Foresight’s London renewable fund raises £70m 57By Andy Thomson, March 2011

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Contents

Section III: Direct investments

Sgt. Osborne’s pensions club band 61By Bruno Alves, December 2011

Let me have a go 62By Andy Thomson, July 2011

Cutting out the middle man 63By Andy Thomson, May 2011

Section IV: In-depth chapters

Developing an allocation strategy for infrastructure 69By David Altshuler, Meketa Investment GroupVehicle options 71Establishing an allocation 76Conclusion 80

A limited partner’s expectations of a general partner 81By John Ritter, Teacher Retirement System of Texas

Promoting investment in Asia’s clean energy market 85By Bindu N. Lohani, Johanna Klein and Anil Terway, ADB

Infrastructure funds – legal terms and conditions 91By James Gee, Weil, Gotshal & MangesIntroduction 91What is infrastructure? 91Fund economics 92New carry structures: secondary infrastructure 94Hybrid funds 95Catch-ups 95Transaction fees 96Fund formation costs 96Manager co-investment 96Commitment period and fund term 97No-fault divorce 97Key-man provisions 98Conclusion 98

Infrastructure fund of funds: definition and benefits 99By Richard Clarke-Jervoise, QuartiliumIntroduction 99What are the benefits of investing in infrastructure via a fund of funds? 99What types of funds of funds are available? 101Are there disadvantages of using a fund of fund? 102

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Contents

How does a fund of funds manager select an infrastructure fund manager? 102Tools used in selecting a fund of funds infrastructure manager 102The interaction between fund of funds managers and infrastructure fund managers 103The role of asset management as it relates to a fund of funds 104

UN PRI and ESG considerations for direct infrastructure investors 107By Amanda McCluskey, Colonial First State Global Asset ManagementIntroduction 107About the United Nations Principles for Responsible Investment 108Defining environmental, social and governance 108Environmental 109Social 109Governance 109Why ESG issues are relevant for direct infrastructure investors 109Intra-asset management of ESG 111Whole-portfolio management of ESG 113Colonial First State Global Asset Management case study 113Step 1, Step 2, Step 3, Step 4 114Training the investment team 114Choosing the right valuers 114Facilitating industry benchmarks 115Conclusion 115

Section V: Surveys

Infrastructure Investor survey of limited partner attitudes to fundraising – 2012 119Introduction 119Survey responses 120Allocation 120Measuring performance 124Investment focus 125Fees 126Commitments 129Fund clauses 131Associated professionals 131

Infrastructure market review and institutional investor trends survey for 2012 133By Probitas Partners Institutional investor overview 133Fundraising overview 133Infrastructure institutional investor survey 136Plans for infrastructure investing 139Targeted returns and fees 142Portfolio benchmarks 144

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Contents

Industry and geographical sectors of interest 146Investment structures 148Terms and conditions 149Reasons for not investing 150Infrastructure investment concerns 150Conclusion 151

Section VI: Infrastructure Investor data and rankings

Infrastructure Investor data on fundraising trends and analysis 157 Introduction 157Limited partner appetite 157Limited partner regional breakdown 157Limited partner institution type 157Fundraising 157

Top infrastructure fund closings – 2010/2011 163

About PEI 169

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Figures and tables

Figures and tables

Figures Figure 4.1.1: The core-satellite portfolio approach 73

Figure 4.1.2: Illustrative diversification targets 75

Figure 4.1.3: Infrastructure investment strategies 75

Figure 4.1.4: Example of an infrastructure investment roadmap 76

Figure 4.1.5: Pacing model for a traditional private equity fund 78

Figure 4.1.6: Pacing model for an infrastructure fund 79

Figure 5.1.1: What percentage of your institution’s total investment portfolio is allocated to the infrastructure asset class? 120

Figure 5.1.2: How long has your institution been investing in infrastructure funds? 120

Figure 5.1.3: Does your institution plan to increase its allocation to infrastructure in 2012? 121

Figure 5.1.5: What is the focus of your allocation strategy? 122

Figure 5.1.6: How many infrastructure funds do you invest in? 122

Figure 5.1.7: Which of the following reason(s) does your institution cite for allocating to infrastructure funds? 123

Figure 5.1.8: In deciding to allocate to the infrastructure asset class, which one of the following performance measurements did your institution rely on most? 123

Figure 5.1.9: In deciding to allocate to the infrastructure asset class, how did your instittution reach a firm decision to proceed? 124

Figure 5.1.10: Which investment strategy or strategies do your chosen infrastructure funds follow? 124

Figure 5.1.11: Which geography or geographies do your chosen infrastructure funds focus on? 125

Figure 5.1.12: Which sectors do your chosen funds focus on? 126

Figure 5.1.13: Which of the following infrastructure fund types would your institution consider investing in? 126

Figure 5.1.14: What level of management fees should be realistically charged by infrastructure fund managers? 127

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Figures and tables

Figure 5.1.15: Should management fees be reduced after the fund’s investment period has concluded? 127

Figure 5.1.16: What is the optimum hurdle rate/preferred return before a general partner is entitled to earn carry? 128

Figure 5.1.17: What is the optimum hurdle rate/preferred return before a general partner is entitled to earn carry? 128

Figure 5.1.18: What is the preferred method of carry/carried interest? 129

Figure 5.1.19: What percentage of the fees charged to a portfolio company by a fund manager should be rebated to an investor? 129

Figure 5.1.20: Based on your infrastructure fund investment(s), what is the optimum level of GP commitment in a fund? 130

Figure 5.1.22: Does your organisation insist on a key-man clause when allocating funds to an infrastructure fund? 130

Figure 5.1.23: Does your organisation insist on a no-fault divorce clause when allocating funds to an infrastructure fund? 131

Figure 5.1.24: In the infrastructure fund(s) your organisation has invested have any of the fundraising processes featured placement agents? 131

Figure 5.1.25: If you answered ‘yes’ to the above question, please indicate how you would rate the experience? 132

Figure 5.2.1: Global infrastructure fundraising 134

Figure 5.2.2: Infrastructure fundraising up to 3Q 2011 by region (in terms of capital raised in US dollars) 135

Figure 5.2.3: Infrastructure fundraising up to 3Q 2011 by strategy 135

Figure 5.2.4: Respondents categorised by investor type 137

Figure 5.2.5: Respondents categorised by firm headquarters 138

Figure 5.2.6: Infrastructure investment experience 138

Figure 5.2.7: Drivers for sector target focus 139

Figure 5.2.8: Categorising infrastructure 140

Figure 5.2.9: Appetite for infrastructure 141

Figure 5.2.10: Infrastructure allocations 141

Figure 5.2.11: Investment structures 142

Figure 5.2.12: Investment sectors of interest 143

Figure 5.2.13: Targeted returns for infrastructure 143

Figure 5.2.14: Targeted annual management fees 144

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Figures and tables

Figure 5.2.15 Targeted carried interest 145

Figure 5.2.16: Preferred carried interest hurdle 145

Figure 5.2.17: Portfolio benchmarks 146

Figure 5.2.18: Infrastructure industry sectors of interest 147

Figure 5.2.19: Geographic focus 147

Figure 5.2.20: Interest in emerging markets 148

Figure 5.2.21: Preferred terms and fund structures 148

Figure 5.2.22: Independent versus sponsored fund structures 149

Figure 5.2.23: Terms and conditions focus 150

Figure 5.2.24: Reasons for not investing in infrastructure 151

Figure 5.2.25: Infrastructure investing concerns 152

Figure 6.1.1: LP geographic appetite 158

Figure 6.1.2: LP sector appetite 158

Figure 6.1.3: LP regional breakdown 159

Figure 6.1.4: Institution type 159

Figure 6.1.5: Fundraising – global, by year closed 160

Figure 6.1.6: Fundraising – regional breakdown, by year closed (2009-2011) 160

Figure 6.1.7: Funds in market – geographic focus 161

Table 4.3.1: ADB clean energy investment 2003-2010 87

Table 5.2.1: Ten largest infrastructure funds (November 2011) 136

Table 6.2.1: Top infrastructure fund closings – 2011 163

Table 6.2.2: Top infrastructure fund closings of 2010 165

Tables

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Preface

Although everyone focused on infrastructure fundraising started 2011 in the hope that the year would result in a greater volume of fund dollars raised, the actual result for the year was on par with the $33 billion or so that was raised in 2009. But with some repeat fundraisers with well-established brand names due back in the market in 2012, there is some hope, once again, that there will be a greater capital flow into infrastructure funds.

Investor appetite would appear to be aligned with infrastructure fund managers’ plans. Half of the investors who responded to the Infrastructure Investor survey published in this book stated they will be increasing their allocation to the unlisted infrastructure in 2012. The overriding reason for this centres on institutions being largely underweight in the asset class and appetite for long-term steady returns that match liabilities.

Inside the Infrastructure Fund Investor provides fund managers, institutional investors and associated professionals with a highly relevant resource that assesses in detail how and why investors have embraced infrastructure, and what is driving the particular nuances that shape investor sentiment.

The publication delves into a number of themes and topics that help to build up a coherent and comprehensive understanding of what institutional investors expect of investing in infrastructure funds and why some of the larger more experienced investors are opting to take the direct route to project investments.

Split into six sections, the publication presents a series of thought leadership themes, showcasing what some of the leading investors and fund managers think make successful strategies; an extensive review of funds that closed in 2011; how some investors have embraced direct investments; in-depth chapters that describe core themes and capabilities; findings from surveys illustrating what investors think about all aspect of investing in infrastructure funds; and key data on closed funds and other fundraising statistics.

We at Infrastructure Investor hope that this volume assists your role in fundraising in 2012 and beyond and encourages a greater flow of capital into the asset class.

Anthony o’connorInfrastructure Investor

37

Gravis more than doubles fund size with new fundraise

By Bruno Alves, December 2012

The debt fund tapped the market for a better-than-expected fundraise of £67m, adding to the £65m it had already fully invested from the same vehicle. The fund aims to use the new money to capitalise on ‘significant investment opportunities to provide debt financing to UK infrastructure projects’

London-based fund manager Gravis Capital Partners has successfully managed to raise £67.4 million (€80.8 million; $105.8 million) through a new share issue, more than doubling the size of its fledgling open-ended subordinated debt fund – GCP Infrastructure Fund.

The raise exceeded expectations, considering that Gravis was only originally targeting £60 million in new money through its London-listed feeder fund, GCP Infrastructure Investments. Gravis’ debut £65 million PFI subordinated debt fund was fully invested in May.

“The significant participation in the fundraise by both new and existing investors demonstrates the quality of the company’s investment proposition,” Ian Reeves, Gravis’ chairman, commented in a statement. “The fundraise more than doubles the size of the company and the additional capital raised will allow the Master Fund [GCP Infrastructure Fund] to take advantage of the significant investment opportunities to provide debt financing to UK infrastructure projects,” he added.

In a previous statement, Gravis had indicated that it might also use proceeds from the fundraise to pay down debt related to a facility which was being negotiated for the GCP Infrastructure Fund. The latter recently provided up to £15 million in loans to a portfolio of some 1,500 domestic solar panel installations in England. The GCP Infrastructure Fund is targeting returns of 8 percent.

UK pension invests £20m in GIP Fund II

By Bruno Alves, January 2012

The £760m Northumberland County Council Pension Fund’s debut infrastructure investment went to Global Infrastructure Partners’ second infrastructure fund, which

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Section 2 Inside the Infrastructure Fund Investor

recently reached a first close on $3bn. The pension may do a second infrastructure investment in the next six months

Global Infrastructure Partners (GIP), the New York-based global infrastructure fund manager, is proving popular with small UK pension funds looking to dip their toes into the infrastructure market, with the Northumberland County Council Pension Fund the latest scheme to place its maiden investment with GIP.

The £760 million (€909 million; $1.2 billion) pension fund has committed £20 million to GIP’s second infrastructure fund, which recently reached a first close on $3.04 billion, according to fillings submitted late last year to the US Securities and Exchange Commission (SEC). First State Investments and Meridiam Infrastructure were also said to have competed for the mandate.

The UK pension had earmarked up to 5 percent of its portfolio, or £38 million, for its maiden infrastructure investment, with a spokeswoman adding the pension may invest in a second infrastructure fund within the next six months.

Last year, the £1 billion Shropshire County Pension Fund also invested in GIP’s second infrastructure fund to the tune of £30 million. The investment was also the pension’s first foray into the infrastructure space.

GIP’s Fund II is targeting a final close of $6 billion. The New York investor closed its first, $5.64 billion fund in May 2008, which has invested in the likes of the UK’s Gatwick Airport, Australia’s Port of Brisbane and US wind farm developer Terra-Gen power.

Investors in the first fund include the likes of Alaska Permanent Fund, Industriens Pension of Denmark and the UK’s West Midlands Pension Fund.

HgCapital beats target with €542m renewable fund

By Andy Thomson, December 2011

The European private equity firm was in the market for 20 months with its second renewable energy fund and comfortably surpassed a €500m target

London-based private equity and renewable energy fund manager HgCapital has raised around €542 million for its second renewable energy fund (RPP2), according to market sources.

The firm spent around 20 months on the fundraising trail and beat its €500 million target. The firm’s first renewable energy fund, RPP1, closed on €303 million in 2006.

Infrastructure Investor previously reported that RPP2 had reached €390 million in July this year. At that point, HgCapital Trust announced that it had committed €40 million to the fund compared with a €21.6 million commitment to the predecessor fund. HgCapital

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Fundraising

Trust is a London Stock Exchange-listed investment trust which takes minority stakes in HgCapital’s deals.

HgCapital Trust says its target return for its investments in HgCapital’s renewable energy funds is between 17 percent and 20 percent per annum.

RPP2 will replicate the strategy of RPP1, which has been building utility-scale power platforms across Europe, including six operating onshore wind projects in the UK totalling 113 megawatts and seven operating solar projects in Spain totalling 61 megawatts.

By July, RPP2 had invested in two platforms: two Swedish onshore wind projects with 85 megawatts under construction; and 14 Spanish mini-hydro projects of 55 megawatts, with a further 16 megawatts to be built in the next 12 months.

Last month, HgCapital was among a group of 14 international investors that served the Spanish government with a demand for international arbitration over its December 2010 decision to retroactively change the tariff regime regulating investments in the country’s solar photovoltaic sector.

In its latest deal earlier this week, HgCapital closed a £28 million (€33 million; $44 million) project financing facility on the 24-megawatt Hall Farm wind project near Beverley in the East Riding of Yorkshire in northern England.

According to a statement from RidgeWind, which developed the project, Hall Farm is “majority owned” by HgCapital. Renewable energy company Statkraft will purchase the power generated by the project, RidgeWind said.

RidgeWind went on to state that Royal Bank of Scotland provided £28 million in financing. The wind farm is set to begin operation in November 2012. RidgeWind chief operating officer Dan Glasgow remarked in a statement that the deal was a “milestone” considering the current “financial climate”.

RidgeWind describes itself as the “sixth largest” independent wind farm developer in the UK.*This story included additional reporting from Chris Glynn

UK pension helps AMP debt fund to reach €284m

By Bruno Alves, December 2011

The AMP Capital Infrastructure Debt Fund has held a third close following an allocation from East Riding of Yorkshire Council Pension Fund – its first UK pension investor. The fund has welcomed six new LPs from the UK and Japan and clinched its first US deal

Sydney-based AMP Capital has reached a third close for its subordinated debt fund – the AMP Capital Infrastructure Debt Fund – after securing its first commitment from a UK pension fund, AMP announced today.

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4.2 A limited partner’s expectations of a general partnerBy John Ritter, Teacher Retirement System of Texas

As the manager of the TRS Other Real Assets portfolio, I have often been asked exactly what a limited partner expects from a general partner. Although this sounds like a simple question, answering it is much more complicated. A limited partner is usually seeking a return that fits a particular risk profile for its own portfolio; the investor needs a manager that can provide this risk-return profile. Therefore, the first rule is: know yourself. Before you can have an expectation of a general partner, you have to know exactly how you expect infrastructure to fit into your own portfolio and what you expect to get out of it.

Infrastructure is a vast group of assets that generally share similar stable long-term cash-flow profiles. However, not all infrastructure is created equal. The risk profiles can vary dramatically from asset to asset. Risks can vary by geography, such as those in emerging markets and those in Europe, for example. Risks can vary by stage of lifecycle, such as greenfield development or an asset considered to be a stable cash-cow. They can also vary in amount of market exposure and regulatory risk. As in real estate, infrastructure can be broken down into three primary sub-groups by their overall risk profiles, that is, core, value-added and opportunistic.

Assets in the core category have bond-like characteristics, and correspondingly have lower returns, whereas at the opposite end of the spectrum, opportunistic investments are made in high-growth, development-oriented assets with the highest risk with commensurate returns. If an investor is looking for a substitute for a bond portfolio, it will lean more towards core infrastructure, but if an investor is looking for a substitute for equity it will be more inclined to favour value-added and opportunistic investments. At TRS, our infrastructure investments fall into our equity portfolio. Therefore, our investments generally fall into more value-added and opportunistic assets, and the organisation looks for managers that are skilled in these areas.

Just as not all infrastructure is created equally, not all infrastructure managers are the same. Finance and portfolio management have a long history of measuring manager alpha, that is, the amount of return a manager brings to the table through his skills, connections and expertise over and above what the market would bring on its own. In infrastructure, the amount of available alpha varies depending on where the focus of investment is on the value-added curve.

Alpha (required management and operational expertise) increases in line with movement up the value-added curve from core to opportunistic. A stable core asset with bond-like characteristics needs little operational expertise and provides little opportunity for

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4.4 Infrastructure funds – legal terms and conditionsBy James Gee, Weil, Gotshal & Manges

The private infrastructure fund market continues to seek new terms and structures that can help it to break away from historic private equity fund norms, but it remains unclear whether recent trends reflect evolution in infrastructure fund terms or a short-lived response to difficult market conditions.

Over the past 30 years, the private fund model has been hugely successful. The recent financial crisis does not change this fact. Indeed when considering that the origins of the crisis lay in the failures of the securitisation model to properly align the interests of investors and originators, the benefits of private funds are brought into even sharper focus: a large part of the success of private funds is because of the manner in which sophisticated fund documentation has been able to successfully align the interests of investors and managers.

Towards the end of the boom the relative growth of the private infrastructure asset class began to outpace the rate of expansion of private equity fundraising generally. Significantly, however, it began from a much lower base. While private equity was already maturing as an asset class at the start of the decade, private infrastructure was only just emerging.

Against this background it should be no surprise that the new asset class has borrowed so many of its fundamental terms from private equity. Those terms had stood private equity in good stead and as the Great Moderation allowed both managers and investors to prosper, broadly recognisable market standards had developed which were generally acceptable to managers and investors alike. What is perhaps most striking about the terms of many of the infrastructure funds seen in the market is their similarity to private equity fund terms. This could be changing however. Even before the current financial crisis there were signs that the infrastructure asset class was starting to see different pressures on its fee structures. The crisis has given greater force to some of these pressures.

There are various drivers for the differences in the terms that are seen between private infrastructure investment and mainstream private equity (meaning, broadly buyouts and venture capital). However, before exploring them further it is necessary to be clear about what types of infrastructure investment are being discussed.

The key point to note is that the terms for funds investing in ‘secondary’ infrastructure (that is, infrastructure projects that have already been completed and are now producing a regular yield) are notably different from ‘primary’ infrastructure (that is, investments

Introduction

What is infrastructure?

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Section 4 Inside the Infrastructure Fund Investor

in projects which are yet to be or are in the process of being developed). The former is perceived as being less management-intensive and intended to produce a steady, relatively low-risk yield, whereas the latter requires more management time but looks to produce a higher return by adding value to an undeveloped project.

As a broad principle the terms for primary infrastructure are very similar to those seen in the wider private equity market, but as the focus of a fund moves towards secondary infrastructure the terms can become very different. The picture is complicated by the fact that many managers look to invest throughout both primary and secondary stages of the cycle. As such it is not always clear where the dividing line lies – and there are some funds investing in secondary infrastructure whose terms are in many ways surprisingly similar to those seen in typical private equity model.

So what are the key terms that investors are likely to see when investing in different types of infrastructure funds? Clearly price is critical. So it is perhaps surprising that, even now, after two years of comparative drought, that a recent Preqin survey claimed that over 60 percent of recent funds continued to be able to charge a 2 percent management fee. The truth is more complex however. Firstly, this statistic hides an inherent survivorship bias. Many managers are having to abandon fundraisings or scale back targets; so the classic 2 percent headline fee is being charged on reducing quantities of capital. Capital which may previously have been invested through funds is increasingly being pushed by sophisticated investors into separate accounts or co-investment arrangements with lower fee arrangements.

Secondly, the headline rate increasingly disguises a range of mechanisms which are pushing the charge down: rebates to large or early-close investors; charging a lower rate on commitments above a certain level thus creating an effectively lower blended rate; in some cases a shift to charging only on drawn commitments or charging a lower rate on undrawn commitments. Mechanisms such as these can mean that the headline figures captured in standard industry surveys can hide the industry-wide pressure on fees.

As always however, and as with the private equity market generally, it is usually the larger funds that are expected to bring to bear economies of scale that can keep headline rates around 1.5 percent and often lower than that, while smaller funds (and particularly first-time funds, where they can be raised) might still be able to demand the full 2 percent and occasionally more. Investors should look not simply to the size of the fund but also its investment style and the headcount it needs to support. There is no point cutting a manager’s fee base to a level at which it loses its talent or is otherwise unable to properly service the fund.

It is not just about fund size however. Given the perception that secondary funds are not as management-intensive and seek a lower yield, their management fees tend to be at the lower end. Indeed, pure secondary funds backed by government concessions and with little revenue risk often charge as little as 1 percent of assets under management; in some bespoke cases this is even less.

Fund economics

Management fee

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4.5 Infrastructure fund of funds: definition and benefitsBy Richard Clarke-Jervoise, Quartilium

An infrastructure fund of funds is an investment vehicle which, rather than seeking to acquire infrastructure assets directly or to invest in projects, is itself invested in a number of infrastructure funds, typically investing in between ten and 20 funds. The primary role of the fund of funds manager is to construct a well-diversified portfolio and to select only those managers which will enable the fund of funds to outperform the average for the asset class.

Like the asset class as a whole, the infrastructure fund of funds segment is in its infancy with the first funds of funds having been launched from 2008 onwards. Currently, they represent only a very small portion of the overall asset class. It is expected that as the asset class matures funds of funds will become an increasingly important source of capital for the sector and, with time, may represent as much as 20 percent of total funds invested into infrastructure funds, as for the private equity asset class.1

Nonetheless, while individual funds of funds may be young, the organisations managing infrastructure funds of funds typically have their roots in private equity, where they have 20 years or so of experience in structuring and managing private equity funds of funds for a range of institutional investors.

These managers have large investment teams of ten or more investment professionals and have developed significant experience, processes and tools with which to evaluate infrastructure fund managers.

There are a number of benefits to this approach for both small and large investors.

Firstly, for a relatively small investment, an investor can gain access to a significantly more diversified portfolio than would be the case had it invested in a single direct infrastructure fund. A fund of funds will typically invest in ten or more infrastructure funds, these funds will then collectively invest in between 150-200 underlying portfolio companies/assets, thus providing the fund of funds investor with very significant diversification.

Fund of funds managers will also seek to construct their portfolios in such a way as to ensure diversification across a range of geographies, sectors, investment stages (such as greenfield, brownfield or secondary) and vintage years.

1 Preqin Fund of Funds Review 2010.

Introduction

What are the benefits of

investing in infrastructure via a fund of funds?

Optimal portfolio diversification

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Section 4 Inside the Infrastructure Fund Investor

This final point is important since it means that for a manager committing to a fund of funds, a single investment in any given year will provide that investor with access to investments which will typically span as many as seven vintage years, thereby avoiding the portfolio becoming over-concentrated in any particular period and therefore avoiding bubbles.

Infrastructure fund managers domicile their fund structures in a number of jurisdictions using a variety of legal structures (Limited Liability Company, Limited Partnership, Société d’Investissement en Capital à Risque etc.) which, in addition to being unfamiliar to many smaller investors, may in some cases have significant tax and administrative impacts and burdens. In certain cases, such as investments in the US, non-US investors may be required to register with the US tax authorities, and in some cases to seek relief from double taxation or utilise complex blocker structures to avoid taxation at source on certain types of income.

Not only do these considerations make investing in infrastructure funds complex for investors but, in some cases, investors may be prohibited by their statutes or local regulation from investing in certain types of structures. In the case of double taxation or taxation at source, there may be a meaningful negative financial impact for investors if these considerations are not adequately addressed prior to investment.

For those investors with relatively small teams or limited experience of such structures, a major benefit of accessing the asset class via a fund of funds manager is that the fund of funds manager will take care of all these technical, but nonetheless important, aspects of investing in unlisted funds.

In addition to the benefits outlined above, the fund of funds manager will considerably reduce the administrative burden on its investors by limiting the number of capital calls and distributions issued by and providing its investors with a single, consolidated report. Again, for smaller investors, this is of significant advantage since, otherwise, the investor would be required to administer and account for 50-100 capital calls and distributions annually in multiple currencies and to process a minimum of 40 fund reports annually.

However, perhaps the single most important benefit of the fund of funds approach is the fact that the size of the fund of funds manager’s team means that it is able to dedicate considerable resources to its analysis and review of infrastructure managers and opportunities and is therefore well placed to select only the strongest managers and those which are most likely to outperform their peer group. Furthermore, a fund of funds manager’s interests are typically closely aligned with those of its investors through a carried-interest structure, thereby ensuring that manager selection is solely focused on achieving long-term performance rather than on being paid fees in the short term for each new commitment made.

This approach is different from other types of advisory-type models where investors pay their advisers a retainer or a fee for each commitment made to a new fund. In the case of

Management of tax and jurisdictional

issues

Reduced administrative

burden and simplified reporting

Superior manager selection

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5.1 Infrastructure Investor survey of limited partner attitudes to fundraising – 2012

The Infrastructure Investor survey of limited partner (LP) attitudes towards investing in unlisted infrastructure funds was launched in late 2011 and the survey closed in January 2012.

More than 1,000 LPs actively investing in infrastructure funds or those that have expressed an interest in investing in infrastructure funds were invited to participate in the survey. In addition, limited partners actively investing in private equity and private real estate funds were also invited to participate, to capture any fund investors looking to allocate to infrastructure for the first time from their existing alternative investment portfolios. This took the total universe of invited institutional investment institutions to more than 4,000. In total, 52 respondents completed the survey.

This year’s survey mirrors a similar survey which was completed by Infrastructure Investor in October 2009, the findings of which were published in The Definitive Guide to Infrastructure Fundraising at the same time. The objective of this year’s survey is to present direct comparisons between late 2009 and 2012.

Although it not possible to prove that the respondents of both surveys represent the same types of investing institutions, the pool of invited investors for both surveys covers all known limited partners in all known private infrastructure funds, covering all types of infrastructure strategies in all geographic regions.

As with the findings of the 2009 survey, the following results are presented in a simple and transparent format, allowing readers to take the raw data and draw comparisons between investor sentiment and attitudes to infrastructure fund investing.

Following the same format of the 2009 survey, this year’s questions are grouped into a number of categories: allocation; measuring performance; investment focus; fees; commitments; fund clauses; and views on associated professionals. Some of the questions asked respondents to choose from a list of options, which result in the answers adding up to 100 percent, whereas other questions permitted more than one response.

Introduction

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Section 5 Inside the Infrastructure Fund Investor

Survey responses

Question 1: Allocation levels are trending upwards. Whereas in 2009 only one-third of respondents stated that they had allocated 5 percent or more of their overall investment portfolios to infrastructure funds, this has increased today with nearly three times as many respondents indicating that their organisations allocate more than 10 percent of their total investment portfolio to the asset class (8 percent in 2009). At the lower end of the total allocation scale, a quarter of respondents had indicated their institutions allocated less than 1 percent of their portfolio.

Allocation

Figure 5.1.1: What percentage of your institution’s total investment portfolio is allocated to the infrastructure asset class?

<1%

1-5%

5-10%

>10%

23.1%

38.5%

15.3%

23.1%

Source: Infrastructure Investor limited partner fundraising survey 2012

Figure 5.1.2: How long has your institution been investing in infrastructure funds?

2 to 3 years

4 to 5 years

5 to 10 years

10 years+

23.1%

38.5%

11.5%

26.9%

1 year or less = 0%

Source: Infrastructure Investor limited partner fundraising survey 2012