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.