Open-end favored, but closed-end predominate
More institutional investors might invest in infrastructure if there were more longer-lived investment structures, such as open-end funds invested in stable projects, consultants say.
Investors like the liquidity and more stable, income-producing portfolios contained in open-end funds.
But most commingled infrastructure funds are closed-end, mainly because they are easier to manage. Despite the demand, very few new global open-end funds have been launched. The one open-end infrastructure fund launched this year is sponsored by Fortress Investment Group and focuses on investing in Japan.
Some closed-end funds, however, are taking on a few of the characteristics of open-end funds to attract investors.
The $184.8 billion California State Teachers' Retirement System's second infrastructure investment, in 2012, was an open-end fund, said Diloshini Seneviratne, a portfolio manager at CalSTRS, West Sacramento. Still, the pension fund is “more heavyweight with closed-end funds,” Ms. Seneviratne said.
“Open-end is better for investors like us, who are looking for long-term investments. ... Open-end funds have more liquidity than closed-end funds,” Ms. Seneviratne said. “If you don't like what you see you can come out of it faster.”
Infrastructure fundraising for closed-end funds has been on a slow but steady upward trajectory in recent years. In the first six months of this year, 10 closed-end infrastructure funds closed, raising a total of $17.5 billion, according to London-based alternative investment research firm Preqin. By comparison, in all of 2013, 58 funds raised $40.7 billion, up from 50 funds that closed on $29 billion in 2012.
There were 149 funds in the market targeting a total of $90 billion as of July 1.
Brad Morrow, head of research in the Americas based in the New York office of Towers Watson & Co., said: “Infrastructure is a better fit with long-term open-end funds, where managers are not selling in five or six years. If there were more open-end funds there would be interest. ... The limited choice of maybe five (global funds) makes it difficult for some investors.”
Infrastructure has the characteristics many institutional investors are looking for — long-term stable assets that are either regulated or have income stream contracts in place. Core infrastructure projects also tend to have very low competition and are very long lived, Mr. Morrow said.
Some closed-end funds have benefited from investor demand for stable, income-producing infrastructure investments.
A number of investors, especially those with liquidity concerns, have been slow to invest their infrastructure allocations due to the lack of open-end funds, said Tamara C. Larsen, senior research analyst in the San Diego office of Russell Investments. However, some closed-end funds have taken advantage of that scarcity by enticing investors with lower fees, investments in smaller projects and other benefits that in the past were available only in an open-end fund.
For example, some infrastructure managers have populated their funds with investments made before the final close. This gives later investors an opportunity to see a sample of the fund's portfolio and share in the income produced, she said.
Melbourne, Australia-based IFM Investors, which sponsors one of the few open-end infrastructure funds, has seen investor interest swell.
“I think there is an increasing desire and interest in core infrastructure in an open-end fund,” said Brian Clarke, an executive director at IFM Investors. “Investors love the long-term nature of the assets, the cash flow component.”
A number of U.S. investors' first infrastructure investments have been in open-end funds. Earlier this year, the $87.4 billion North Carolina Retirement Systems, Raleigh, and $3.6 billion Fresno County (Calif.) Employees' Retirement Association made commitments to IFM's open-end fund.
IFM's open-end fund has $10 billion in committed and invested capital, said Mr. Clarke. IFM executives expect the open-end fund's assets to triple over the next five to eight years.
“Open-ended funds can take a long view,” he said. “A closed-end fund doesn't have that luxury. Most have four-year investment periods at most. They can't be creative in putting the money to work.”
Currently, there are 47 open-end infrastructure funds, with one new fund — the Fortress fund — launched this year. This is up from 30 five years ago, Preqin data indicate.
Few are global, said Ms. Larsen. There are regionally focused open-end funds but the structures and liquidity windows vary, she said. For instance, 17% invest only in Australia and 21% invest in Asia, according to Preqin.
Capital in closed-end funds is locked up for 10 or 15 years, whereas open-end funds tend to have quarterly liquidity and have more frequent external appraisals of the underlying projects, according to Russell.
Open-end funds also allow the manager to buy or sell investments based on market conditions, not the investment timeline of the fund.
Open-end funds are best for mature, stable projects that have regular income streams, said Timothy C. Ng, chief investment officer of New York-based money management firm Clearbrook Global Advisors LLC.
Closed-end funds are good for value-added or opportunistic infrastructure investments, said IFM's Mr. Clarke.
Indeed, the Russell Investments report said so-called greenfield investments that include new construction or value-add, fixer-upper type projects are best in closed-end funds.
John Livingston is CEO of AECOM Capital, a year-old New York money management firm that aims to invest in infrastructure and real estate focusing on construction deals. So far, he said, his firm has invested $2.3 billion in development deals, all real estate.
“Real estate has taken the lead over infrastructure,” said Mr. Livingston. “Infrastructure takes take a lot longer and requires a lot of resources and has geopolitical risk that deals might not actually happen.”
This article originally appeared in the July 7, 2014 print issue as, "Infrastructure funds not the kind investors prefer".