Infrastructure: $132 billion is managed globally for institutions

In this environment, infrastructure managers are quick to note any feature of their investment strategy that they consider a competitive edge.

For example, Tim Kashem, director at London-based infrastructure manager Innisfree Ltd., said his firm concentrates on a narrow area of public-private partnerships.

“Public-private partnerships sit at the low risk end,” Mr. Kashem said. “There's not much in the U.S., but it's a market that has existed for 20 years in the U.K. and increasingly, the rest of the world.”

Over the past 14 years, Innisfree has raised three funds for primary investments in infrastructure such as hospitals and schools, where the main user is a governmental entity, he explained. An example in the U.S. would be Department of Defense housing.

Innisfree's approach is to invest in projects with a fixed line of revenue, with increases that are tied to an index such as the consumer price index.

The firm also buys infrastructure in the secondary market from managers needing or wanting to exit an investment. Mr. Kashem said he expects Innisfree's secondary business to blossom as investors such as international banks try to sell off stakes in infrastructure investments to comply with global banking risk-based rules.

“We've seen 300 secondary deals in the last seven or eight months,” he said.

The dramatic downturn in the market led some infrastructure investors and investment managers to rethink their strategies, which “created some interesting opportunities” to capitalize on other investors' “buyer's remorse,” said Dan Revers, managing partner of Boston-based infrastructure manager ArcLight Capital Partners. “One year ago there were aggressive bidders. The universe is slightly less aggressive (now) because people underpriced but did not understand the risk.”

“In our funds we focus on cash flows. We're a traditional infrastructure manager. We are trying to get low single digit to high double digit in terms of yield. We're not shooting for private equity returns in our IRR (internal rate of return),” Mr. Revers said.

So, less than 10% of ArcLight's investments have been at the construction stage. “Infrastructure is supposed to be non-correlated, but traffic reports on a road are tied to economic growth. A lot of the infrastructure funds were focused on those types of assets, and those assets have seen significant reduction in performance,” he said.

ArcLight, which manages $4.7 billion in institutional infrastructure assets, concentrates on the energy and power infrastructure sectors. Infrastructure managers in those sectors have not faded away, but they did slow down because they raised capital and the deal flow did not materialize, he said.

The sources and nature of infrastructure financing also have changed during the recession. Innisfree typically lines up debt so that it matches the life of the concession, which is like a contract to operate the project, typically for 30 years. This was difficult during the recession. A number of lenders left the business or drastically reduced lending. The loans that were available were on less favorable terms, more expensive and for shorter durations, Mr. Kashem acknowledged. The debt situation has improved over the past 12 months, he added.

Darby Overseas Investments Ltd. executives also say their strategy is different. The firm invests in small or midsize enterprises in emerging markets, said David W. Hudson, senior managing director and head of global infrastructure at Darby.

“We don't look at the large marquee projects like huge ports and toll roads,” Mr. Hudson explained. “We offer expansion capital and would be looking for proven business platforms with proven business models and positive and sustainable cash flows that could be expanded.”

Darby raises focused, country-specific funds offered to institutional investors in their home countries. The firm has two dedicated infrastructure funds, one in Brazil and another in South Korea. In addition, Darby's private equity and mezzanine funds, which are both country-specific and regional, also make infrastructure investments, Mr. Hudson said. Indeed, 40% of Darby's total $1.58 billion assets under management are invested in infrastructure and infrastructure-related businesses, he added.

Infrastructure investment managers are seeing interest in investing in infrastructure outside of funds.

Limited partners in Goldman Sachs' infrastructure fund also sometimes invest directly alongside the fund, as do other institutional investors, said Julian Allen, chief operating officer, who heads up the co-investment team for Goldman's infrastructure investment group.

However, Goldman Sachs' infrastructure group does not offer separate accounts or direct investments in projects for which a Goldman fund is not an investor, Mr. Feldman said.

“A flood of direct investment from public pension funds and sovereign wealth funds has been earmarked for energy infrastructure, but very little has actually been invested to date,” Mr. Revers said.

Institutional investors realize that they can ill afford to pay the usual fee structure of 2% management fee and 20% performance fee, he said.