Probitas urges new approach to infrastructure investing

Limited partners should cast aside traditional categorisations of risk and re-think expected returns and fees, according to a white paper published by the placement agent. The paper also identifies 70 funds in the market for $100bn, of which 55 are first-time managers.

Amid a fundraising climate where a record 55 of 70 infrastructure funds in market are first-time funds seeking capital, limited partners should re-think traditional investment risk categories such as “brownfield” and “greenfield” and adjust their expected returns and investment fees accordingly.

That is the theory put forth by San Francisco-based placement agent Probitas Partners in a new white paper on infrastructure investing.

Probitas argues that investment categorisations – such as brownfields, or existing infrastructure assets, rehabilitated brownfields, or repair-intensive existing assets, and greenfields, or new construction projects – have fallen woefully short of correctly delineating risks for infrastructure investments.

“The notion that they categorically define risk has been proved a falsehood after the recent collapse of the financial markets”, Probitas argues, challenging the conventional wisdom of brownfields being less risky than rehabilitated brownfields and greenfields due to their additional permitting, planning and construction risks.

Brownfield vs. Greenfield: old school.

As evidence, Probitas points to “theoretically ‘safe’” brownfield investments in assets like toll roads, which have in practice proven to be riskier than rehabilitated brownfield or greenfield investments due to aggressive leverage.

The firm proposes a new risk-return spectrum to investors, which introduces leverage into the equation and differentiates between six categories of assets. These include conservatively-leveraged core brownfields on the low end of the spectrum and highly-leveraged brownfields and emerging market greenfield projects on the other end. Assets that depend on operational expertise to meet their investment goals, such as value-added greenfields or private equity-style infrastructure investing, fall in between.

Infrastructure risk-return spectrum: leverage matters.

                                                                                                                                           

 
Reflecting on this “more modern” view of the risk-return spectrum for infrastructure, Probitas also recommends that investors rethink their expected returns and, consequently, fees. Kelly DePonte, research director at Probitas, said many brownfield-focused funds were advertised to LPs with 18 percent to 20 percent internal rates of return (IRRs) and 1.5 percent management and 20 percent carried interest fees. Historical returns, though, have been more in the neighbourhood of 10 percent to 12 percent.

A lot of LPs are pushing back and saying, 'if I am going to be buying into a very long-term asset generating a 10 percent IRR, why should I be paying 1.5 and 20?' 

Kelly DePonte

“A lot of LPs are pushing back and saying, ‘if I am going to be buying into a very long-term asset generating a 10 percent IRR, why should I be paying 1.5 and 20?’” DePonte said.

Still, LPs are unlikely to cut out fund managers all together and invest directly in infrastructure. Those that have done so have found that the costs of hiring a competent direct investment team were equivalent to approximately a 1.5 percent management fee, and many of the direct and co-investments have suffered lacklustre returns.

Instead, LPs are likely to press fund managers to lower fees. But Probitas cautions LPs against pursuing lower management fees and carry without regard for fund strategy. Funds with a heavy greenfield or private equity focus require more senior staff time to oversee investments. So a higher fee structure may be justified for those higher-returning strategies. And by investing with less-proven managers willing to accept below-market terms, LPs may actually be increasing their investment risk.

However, in the current market environment, LPs may not have much of a choice. Of 70 funds seeking approximately $99 billion that Probitas has identified in its latest list of funds in the market or about to come to market, 55 are first-time funds, DePonte says. He credits this to the relative youth of the asset class itself.

“There’s no way around just having a ton of first time funds. Logistically, that’s almost the way it’s got to be,” DePonte said.

And while the list of second and third-time funds does include funds with corporate sponsors, like Goldman Sachs Infrastructure Partners II, Probitas believes the market is likely to see more independent fund managers in the future. The benefits of sponsorship have diminished due to investor weariness over conflicts of interest and sponsors’ decreased ability to make large cornerstone capital commitments to funds, Probitas said.

The full Probitas fundraising list, re-ranked by target size and converted at spot rates as of press time into US dollars, is reproduced below.

Infrastructure funds in market or coming to market in the next year

Rank

 Fund/Parent

Fund Target
($US mm)

Native
Currency

1

GS Infrastructure Partners II 

 7,500

USD

2

Macquarie European Infrastructure Fund III

 7,076

EUR

3

Macquarie Infrastructure Partners II

6,000

 USD

4

Highstar Capital IV

5,000

USD

5

GS European Infrastructure Fund

4,246

EUR

6

Citigroup Infrastructure Investors

 4,000

USD

7

KKR Infrastructure Fund

 4,000

USD

8

Alinda Infrastructure Fund II

 3,000

USD

9

ABN AMRO Global Infrastructure Fund II

 2,830

EUR

10

CVC European Infrastructure Fund

 2,830

EUR

11

Fondi Italiani Per Le Infrastructure

 2,830

EUR

12

Santander Infrastructure II

2,123

EUR

13

Blackstone Infrastructure Fund

 2,000

USD

14

Gulf One Infrastructure Fund I

2,000

USD

15

Barclays Integrated Infrastructure Fund

 1,652

GBP

16

Brookfield Americas Infrastructure Fund

1,500

USD

17

JPMorgan Asian Infrastructure Fund

 1,500

USD

18

LambdaStar Infrastructure Fund

1,500

USD

19

Macquarie State Bank of India Infrastructure Fund

1,500

USD

20

Macquarie Renaissance Infrastructure Fund

1,500

USD

21

Antin Infrastructure Fund

 1,415

EUR

22

Cube Infrastructure Fund

1,415

EUR

23

ING European Infrastructure Fund

1,415

EUR

24

RBS Infrastructure Fund

1,415

EUR

25

Henderson Infrastructure III

1,322

GBP

26

Carlyle Riverstone Renewable Energy Infrastructure Fund II

1,200

USD

27

Challenger Mitsui Emerging Markets Infrastructure Fund

1,200

USD

28

IDFC India Infrastructure Fund

1,200

USD

29

Emerald Infrastructure Development Fund

1,061

EUR

30

Actis Infrastructure Fund II

1,000

USD

31

ADCB Macquarie Infrastructure Fund

1,000

USD

32

Alterna Core Capital Asset Fund

1,000

USD

33

CPG China Toll Road Fund

 1,000

USD

34

India Infrastructure Advantage Fund

1,000

USD

35

Pan African Infrastructure Development Fund

 1,000

USD

36

SC – IL&FS Asia Infrastructure Growth Fund

1,000

USD

37

Troika Infrastructure Fund

1,000

USD

38

Latin Power & Infrastructure IV

800

USD

39

Asian Giants Infrastructure Fund

750

USD

40

Ampere Equity Fund

708

EUR

41

Aviva European Renewable Energy

708

EUR

42

DIF Infrastructure Fund II

708

EUR

43

European Kyoto Fund

708

EUR

44

Transport Infrastructure Investment Company Fund

708

EUR

45

ADIC UBS Infrastructure Fund I

600

USD

46

Fortis Clean Energy Capital Fund

566

EUR

47

Rabo Bouwfonds Communication Infrastructure Fund

531

EUR

48

African Energy Infrastructure Fund

500

USD

49

Axis Infrastructure Fund

500

USD

50

HSBC Environmental Infrastructure Fund

500

USD

51

Indochina Infrastructure Holdings

500

USD

52

Macquarie Global Infrastructure Fund III

500

USD

53

MENA Infrastructure Fund

500

USD

54

Mubadala Infrastructure Partners

500

USD

55

Q India Fund

500

USD

56

Raising Africa Infrastructure Fund

500

USD

57

RREEF North American Infrastructure Fund

500

USD

58

Bank of Ireland Infrastructure Fund*

425

EUR

59

European Renewable Energy Fund

354

EUR

60

EUROFIDEME 2

354

EUR

61

Saratoga Asia Fund II

330

USD

62

AmKonzen Water Infrastructure Fund

 320

USD

63

Eredene Capital India Infrastructure Fund

 300

USD

64

Darby Mexico Infrastructure Fund

200

USD

65

Piramal Healthcare Fund

200

USD

66

PSource China Infrastructure

200

USD

67

Bunyah GCC Infrastructure Fund

150

USD

68

Central American Mezzanine Infrastructure Fund

150

USD

69

Network European Infrastructure Partners

142

EUR

70

Kagiso Infrastructure Empowerment Fund

84

ZAR

Notes:
(1) 1 GBP = 1.6524 USD; 1 EUR = 1.4152 USD; 1 ZAR = .1288 USD as of press time.
* Editor's note: InfrastructureInvestor has recently learned that this fund is shutting down and will no longer be fundraising.
Source: Probitas Partners.