The small list of infrastructure investment managers is expected to shrink this year.
Whether the firm is a winner or loser depends in large part on fund structure and timing:
• Firms with mostly publicly traded offerings are suffering the most, with some already beginning to fail.
• Those with mostly private equity-type funds that are out of capital are also struggling as the liquidity crisis has made it difficult to raise funds.
• Firms with capital to burn, called “dry powder,” and experienced operators are expected to flourish among falling prices for deals and less competition.
The credit crisis has hit infrastructure investment firms hard. Most of the firms are new: About 90% are either investing or raising their first funds.
Investors are concerned that the lavish amount of debt and slim amount of equity invested in deals, combined with the high prices paid over the last couple of years, will sink some infrastructure managers.
A liquidity squeeze is leaving many institutional investors without capital to commit and even some more established investment firms are having trouble raising their next funds.
Australian managers with public vehicles are feeling the pain. Babcock & Brown Ltd., which bought up infrastructure projects and bundled them into listed funds, has put most of its businesses up for sale to pay down debt. Stock prices of the publicly traded funds of Macquarie Group Ltd. have also plummeted; it lately has focused on advising other firms on deals rather than investing in them.
Allco Finance Group, another listed infrastructure fund manager, is in receivership.
Even those managers with money to invest are having trouble because there is precious little debt available, and what is around is far from attractively priced.
The timing could not be worse, because the investment waters are fine. In fact, insiders expect the number of infrastructure firms to grow eventually, although it is more likely to be a collection of smaller, specialized, regionally focused firms or funds sponsored by buyout firms than giant powerhouses.
“There will be local groups doing local projects. It won't tip the scales in terms of money flows for institutional investors,” said Alan Dorsey, managing director and alternative investment strategist at Neuberger Investment Management in New York.
“There will be more infrastructure managers that will take the form of geographic specific funds (such as Brazilian infrastructure and sector specific like emerging markets or airport infrastructure) and project type funds,” Michael D. Underhill, chief executive officer of Capital Innovations LLC in Hartland, Wis., said in an e-mail response to questions.
But in the short term, even the big private equity firms that also are doing infrastructure deals are struggling. For example, Goldman Sachs Asset Management, after quickly investing the $6.5 billion it raised in December 2006 in its first infrastructure fund, almost immediately set out to raise a $7.5 billion second infrastructure fund. The firm later reduced its target to $5 billion but, so far, has raised a little more than half and is expected to hold a final close with about $3 billion, sources say.