More institutions are directly investing or co-investing alongside managers in infrastructure projects, moving away from commingled funds and redefining the sector in the process.
For institutional investors, taking a direct route allows for a more tailored investment, additional influence over the deals and greater return potential for the risk taken, according to fund executives and consultants.
For investment managers, having co-investors allows them to bid for larger projects without adding concentration risk, when a large portion of the portfolio is invested in one infrastructure project. In some cases, having a partner with specialist knowledge of certain sectors or regions can help managers to improve returns on the assets, said Anthony Stalker, London-based partner and chief operating officer of ADM Capital Europe LLP, an emerging markets specialist manager that offers infrastructure strategies.
Benjamin Way, senior managing director within The Macquarie Group's infrastructure and real assets division based in Beijing, said the company has been working with an increasing number of Asian institutions as co-investors. “We often target domestic money” when bidding for infrastructure projects to gain local knowledge, Mr. Way said. “It's not a prerequisite that you have to have a local investor such as a sovereign wealth fund as part of the consortium to win the deal, but (such an investor) can bring more credibility. ... It's just smart.”
Mr. Way declined to name the co-investors in recent deals, but said they include Asian sovereign wealth funds and pension funds. “Increasingly, the deals are getting bigger and need more equity, and (institutional investors) have more equity capital to deploy,” said Mr. Way, whose firm has about $92 billion in infrastructure assets under management.
While direct infrastructure investing is not new, the number of large institutions with co-investment programs has accelerated since the financial crisis of 2008-2009. At least 20 large institutions have implemented or are introducing direct infrastructure strategies compared with less than half that number five years ago, according to Ryan Orr, executive director of the Collaboratory for Research on Global Projects at Stanford University and co-author of “The New Era of Infrastructure Investing” published in May.
They include SWFs, insurance companies and pension funds — with Canadian and Australian funds leading the way but followed closely by European pension funds, sources said.
In the U.S., the $232.2 billion California Public Employees' Retirement System, Sacramento, began direct infrastructure investing in 2010, buying a 12.7% stake in London's Gatwick Airport.
“Certainly, our long-term objective is to focus on direct investments like the London Gatwick Airport transaction,” Clark McKinley, fund spokesman, wrote in an e-mailed response to questions. “We typically begin such programs with investments in pooled funds, then ramp up with more direct or co-investments with partners as opportunities arise and we gain more experience and resources to do that.”
The $154.6 billion California State Teachers' Retirement System, West Sacramento, made its first $150 million commitment in a commingled infrastructure fund in April and is seeking “to get into co-investments and direct investments,” fund spokesman Ricardo Duran wrote in an e-mail.
CalSTRS is planning to develop direct infrastructure capabilities in-house within the next several years, sources said.
Mark Weisdorf, managing director and CEO of J.P. Morgan Asset Management's infrastructure investments group, said institutional growth in direct infrastructure and co-investment reflects the increasing opportunities since the financial crisis. Under fiscal pressure, “governments around the world are interested in bringing in the private sector to invest in infrastructure projects. Corporations are also looking to sell non-core assets,” said Mr. Weisdorf, who is based in New York. J.P. Morgan has about $5 billion in infrastructure assets under management.