Content Includes: Special Report: Infrastructure Industry Themes Infrastructure Themes Ferguson Partners analyzes the current infrastructure industry, and how it is likely to evolve in the short and longer term. A Joint Preqin and Ferguson Partners Study Unlisted Infrastructure Fundraising Preqin explores the unlisted infrastructure fundraising market, looking at historical and current fundraising stats, the time these funds are spending in market, and more. Unlisted Infrastructure Funds in Market Preqin examines unlisted infrastructure funds currently in market, including a breakdown by fundraising status and primary geographic focus, as well as a list of the 1 largest infrastructure funds currently in market. Institutional Investor Activity in Infrastructure How much capital are investors planning to commit to infrastructure in the next 12 months? What are investors intentions for their infrastructure allocations? We explore the answers to these key questions. alternative assets. intelligent data.
Special Report: Infrastructure Industry Themes Click here to download Infrastructure Themes David L. Thalhamer, Ferguson Partners The appetite for investing in the infrastructure sector globally continues to grow. While infrastructure assets themselves are by defi nition local, investing is a global business and capital and deal fl ow crosses traditional regional boundaries. In this article, we identify several of the themes that emerged in the sector in 213, which point to continued strong interest among investors, and demand for talent among funds and direct investors. Summary This is an exciting time for infrastructure sector investing. The underpinnings and future success of the global economy, social interactions and quality of life will be advanced by the effective deployment of capital within the sector. In 213, infrastructure funds continued to raise capital, refl ecting the trend that began in 29-21. Following the global fi nancial crisis, more capital was dedicated to infrastructure. As average fund sizes have steadily increased, funds are seeking deals. Transaction activity began to increase after a challenging deal market prior to 213. There are many investment strategies across global infrastructure manager platforms. Public private partnerships are abundant in Asia and Europe; however, that form of investing has been much slower to take hold in the United States. In most regions there has been less appetite for greenfi eld development with a shift towards redevelopment of existing assets, particularly those that are consumer-centric from an economic revenue standpoint. Among global markets in the spotlight, India has seen increased interest in development deals begun by another party that require completion capital. Almost universally, the preference is off-market deals. As the sector attracts more capital, the need for talented human capital continues at a steady pace. A wide range of experience is required including investment acumen, operating discipline and leadership. Theme > Change Begets Change Across the infrastructure sector, development projects are being undertaken to respond to economic needs, to repair/ upgrade existing facilities and systems, and to respond to a global economy that is steadily improving. Following are several developments/opportunities that illustrate how change is begetting change globally and within individual economies. When completed, the Panama Canal expansion will create yet another worldwide impact. Larger, deeper-hulled ships using the passage will trigger the need to increase the clearance under many bridges and deepen channels. For example, the Bayonne Bridge in New Jersey will have to be raised to accommodate these larger vessels. This is but one of many examples where development in one area creates corresponding demand for development elsewhere. Much infrastructure is dependent upon robust and secure technology driven by interconnected computers. This dependence on technology to operate assets combined with the potential vulnerability of these systems to cyber-attacks indicate the need for ongoing re-investment in the operation platforms of power grids, dams, nuclear reactors and transportation systems. The slowly growing trend toward natural gas and electric powered vehicles will correspond with heightened demand for quick, reliable and numerous refi lling stations in order for these fuels to become more prevalent. One divergent result will be the increased loss of tax revenue to municipalities from the gasoline tax that currently represents a signifi cant portion of fuel cost. Another example is the necessary rebuilding of Northeast cities, including New York, following the extensive damage caused by tropical storm Sandy and the nor easter that followed it. The storm exposed how susceptible many coastal cities are to severe weather. Sandy knocked out power to much of New York City, damaged electric and telecommunication sub-stations and shut down subway and commuter rail systems. These vulnerabilities confi rm that much long-term work is needed to fortify coastal cities in order for them to withstand the effects of more frequent and more severe weather, a phenomenon expected to continue. Theme >> Government Decision-Making Impacts Asset Class Many regulatory and legal jurisdictions federal, state, county and city governments create tougher environments in which to execute public private partnerships of existing assets, or create new infrastructure. This has been an impediment in rebuilding aging transportation assets such as highways, airports, bridges and tunnels. The limited availability of tax-advantaged fi nancing structures makes it more diffi cult to modernize infrastructure with private capital. However, while government budgets remain under pressure, there is optimism that private capital will have more opportunities to invest in infrastructure. In Europe, several governments are using infrastructure investing as a means of stimulating sluggish economies. In Australia, privatization of ports and gas distribution demonstrates a robust public-to-private market. Conversely, in China, government spending on infrastructure has dropped significantly following fi ve years of heavy spending, which some observers calculate as a main cause of China s 5% GDP reduction. Overall, these regional examples illustrate how government decisions impact infrastructure. 2 214 Preqin Ltd. / www.preqin.com
Click here to download Special Report: Infrastructure Industry Themes Theme >>> Energy Sector in Focus Infrastructure equity is hyperactive in today s booming oil and gas market. Competition has increased as many investors have entered the energy space. Across the spectrum of upstream, midstream and downstream, there are abundant and varied opportunities for investing in energy needs. Oil and gas opportunities have become more favorable, while power generation has lost some of its previous attraction, except in Asia where renewables have gained traction. Exploration, drilling and fracking activity in the Marcellus and Bhakken Shale regions of the United States have created tremendous opportunity for energy sector investing. Pipeline and transport development continues in response to demand to move more oil and natural gas. The distribution system in the United States was predicated upon importation; now, however, these systems are being modifi ed to allow for the fl ow of natural resources to ports for export. With the advanced technologies available to extract known reserves, the US is creating the infrastructure required to be a global net exporter of energy. With the discovery of shale deposits, oil and gas has to be extracted, stored and transported to the end consumer wherever that market exists. Natural gas must be liquefi ed into LNG and shipped from US ports to global markets. And, as more vehicles are fueled by natural gas, a tremendous delivery distribution infrastructure must be created to provide natural gas to endusers. Theme >>>> The Investment Structure Increasingly, investors are looking at direct and co-investment strategies as well as placing capital with general partners in discretionary funds. Direct investing has been a long-standing strategy in Canada, and is being examined in Europe. In the United States, the large public fund CalPERS invests directly and also allocates capital with several infrastructure funds. There continues to be discussion around separate account investing as a means of a higher degree of involvement with the manager. As the infrastructure investing market matures globally it is increasingly recognized as a separate sub-category investment class of alternatives sometimes combined with real estate under real assets. The global fundraising market remains robust for established funds, especially as the largest and most active funds raise capital. Some emerging funds with specifi c focused strategies are experiencing a longer fundraising cycle. Interest in infrastructure remains strong among investors. With traditional fi xed income yields at historic lows, infrastructure can provide more attractive predictable returns over time. More aggressive strategies such as energy investing may provide higher risk-adjusted returns than competing corporate private equity platforms. As markets continue to mature, expected yields have become more closely aligned with investment risk whether investing in a non-regulated utility, toll road, renewable energy or parking concession. Theme >>>>> Human Capital Many infrastructure investment management professionals have investment banking, project fi nance and private equity experience prior to forming and working in infrastructure funds. Increasingly, funds are adding talent that brings operating and asset management experience. Talent from European, Asian and Canadian funds is also being imported by US-based funds. As funds raise capital and execute deals, there will be more demand for portfolio managers and asset managers to oversee the development and operation of these investments. Firms continue to seek innovative professionals who can create off-market deals and avoid auctions. Many fi rms are looking to hire investment professionals to identify, structure and close on deal fl ow. With keen competition for capital, and the emergence of a separation into haves and have-nots, fundraising professionals with strong relationships and contacts continue to be critical to many fi rms. Furthermore, among investors who make direct investments, there will be increasing need for talent with asset management and board-level experience within those targeted operating sectors. In the infrastructure investment sector, it is imperative that executives interact effectively with many varied outside stakeholders, including governments, regulators, and limited partners, as well as employees. A wide degree of experience, skills and leadership will be necessary to balance the sometimes competing needs of all involved. Theme >>>>>> Compensation Compensation structure remains similar to the private equity and hedge-fund model. Total compensation for executives within fund management is aligned with limited partner investors. The preponderance of remuneration is in the form of long-term incentive compensation plans, whereby the amounts are being driven by the carried interest or profi tability of the investment portfolio, development or transaction. Conclusion As the infrastructure sector continues to experience steady growth, it will remain desirable for many investors who are attracted by the potential to earn favorable risk-adjusted returns. To date in the sector, infrastructure funds, particularly the largest 214 Preqin Ltd. / www.preqin.com 3
Special Report: Infrastructure Industry Themes Click here to download and more established among them, continue to raise signifi cant capital. At the same time, ample development is occurring around the world from expanding and upgrading existing infrastructure to new energy projects which will open new opportunities for private capital. Within this dynamic, there will be continued demand for talent with investment experience, deep relationships, and the proven ability to interface with a variety of stakeholders. 4 214 Preqin Ltd. / www.preqin.com
Click here to download Special Report: Infrastructure Industry Themes Unlisted Infrastructure Fundraising The level of institutional investor capital secured by private infrastructure funds that closed in 213 was the highest the industry has seen since 28. As illustrated in Fig. 1, 49 unlisted infrastructure funds reached a fi nal close in 213 raising a signifi cant $39bn. This represents 34% more capital than was raised by infrastructure funds that closed in 212 and 63% more than was achieved in 211. In addition, a further $14bn was secured by infrastructure funds holding an interim close in 213. Encouragingly, the average fund size of unlisted infrastructure funds has been steadily increasing since 211, from $553mn for funds closed in 211 to $875mn for funds closed so far in 213 (Fig. 3). This indicates positive momentum in the market as fund manager and investor confi dence in infrastructure picks up, with investors committing signifi cant amount of capital to individual funds. Fig. 1: Annual Unlisted Infrastructure Fundraising, 27-213 Fig. 4 reveals that the average time spent in market for unlisted infrastructure funds rose steadily following the fi nancial crisis, from only 11.4 months for funds closed in 27 to a peak of 23.4 months for funds closed in 212. Funds closed in 213 spent an average of 21.6 months in market, emphasizing the challenging fundraising environment, with many funds struggling to achieve interim closes or to reach their target size. The largest fund to close in the period 27 to 213 is Global Infrastructure Partners II, which reached a fi nal close in October 212 on a signifi cant $8.3bn. The fund, managed by Global Infrastructure Partners, invests 1% of its capital in mature brownfi eld infrastructure projects in a range of sectors, including energy, natural resources, transportation, utilities, waste management and water. Fig. 2: Unlisted Infrastructure Fundraising by Primary Geographic Focus, Funds Closed in 213 7 6 5 4 3 2 1 45 4 59 41 29 11 48 32 45 24 5 49 29 39 No. of Funds Closed Aggregate Capital Raised ($bn) 2 18 16 14 12 1 8 6 4 2 12 18.2 19 12.8 1 3.3 8 5.2 No. of Funds Closed Aggregate Capital Raised ($bn) 27 28 29 21 211 212 213 Year of Final Close North America Europe Asia Rest of World Primary Geographic Focus Fig. 3: Average Annual Deal Size of Unlisted Infrastructure Funds, Funds Closed 28-213 Fig. 4: Average Time Spent in Market by Unlisted Infrastructure Funds by Year of Final Close, Funds Closed 27-213 Average Deal Size ($mn) 1 9 8 7 6 5 4 3 2 1 875 742 68 647 553 391 28 29 21 211 212 213 Average Time Spent in Market (Months) 25 2 15 1 5 23.4 21.6 19.3 19.6 17.9 15.2 11.4 27 28 29 21 211 212 213 Year of Final Close Year of Final Close 214 Preqin Ltd. / www.preqin.com 5
Special Report: Infrastructure Industry Themes Click here to download Unlisted Infrastructure Funds in Market The number of unlisted infrastructure funds in market has been rising in recent years, from 84 in January 29 to 139 in January 214. However, the aggregate capital sought by these funds remained relatively consistent over recent years, standing at $89bn as of January 214, compared to $9bn in January 29. The largest number of funds in market primarily focus on European infrastructure investments, with 55 funds in market targeting the region, compared to 34 focusing on North America and 19 targeting Asian investments. However, these managers are likely to spend a considerable amount of time on the road, with 5% having already been in market for over 18 months. Fig. 5: Unlisted Infrastructure Funds in Market over Time, January 27 - January 214 16 14 12 1 8 6 4 47 39 7775 17 9 9 84 122 86 144 93 137 139 85 89 No. of Funds Raising Aggregate Target Capital ($bn) Half of unlisted infrastructure funds currently raising have yet to hold an interim close (Fig. 7). The challenging fundraising environment and the relative inexperience of many infrastructure fund managers means that many spend a signifi cant amount of time on the fundraising trail in order to reach a fi nal close, as shown on page 5. 2 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Fig. 6: Unlisted Infrastructure Funds in Market by Primary Geographic Focus (As at 16 January 214) Fig. 7: Breakdown of Unlisted Infrastructure Funds in Market by Fund Status (As at 16 January 214) 6 55 5 4 3 2 1 32 34 35 31 13 19 9 No. of Funds Raising Aggregate Target Capital ($bn) 36% 9% 5%1% 5% No Interim Close First Close Second Close Third Close Fourth Close Europe North America Rest of World Asia Primary Geographic Focus 6 Fig. 8: 1 Largest Unlisted Infrastructure Funds in Market by Target Size (As at 16 January 214) Fund Firm Target Size (mn) Geographic Focus Fund Status Brookfi eld Infrastructure Fund II Brookfi eld Asset Management 5. USD North America First Close EIG Energy Fund XVI EIG Global Energy Partners 4.3 USD North America First Close Energy Capital Partners III Energy Capital Partners 3.5 USD North America Raising Alinda Global Core Infrastructure Fund Alinda Capital Partners 3. USD North America First Close Morgan Stanley Infrastructure Partners II Morgan Stanley Infrastructure 2.5 USD North America Raising First State European Diversifi ed Infrastructure Fund Colonial First State Global Asset Management/First State Investments 1.5 EUR Europe Fourth Close Bastion Infrastructure Fund Bastion Infrastructure Group 2. USD North America Raising ISQ Global Infrastructure Fund I Squared Capital 2. USD North America Raising Macquarie Infrastructure Partners III Macquarie Infrastructure and Real Assets (MIRA) 2. USD North America First Close Terra Firma Infrastructure Fund for Global Renewable Energy Terra Firma Capital Partners 2. USD Europe Raising 214 Preqin Ltd. / www.preqin.com
Click here to download Special Report: Infrastructure Industry Themes Institutional Investor Activity in Infrastructure Unlisted infrastructure fundraising was particularly strong in 213, as investor appetite for infrastructure exposure continues to grow. The infrastructure investor universe is still relatively small when compared to other alternative asset classes and many investors are inexperienced in the space. Fund manager competition for investor commitments is therefore higher than ever, with a large number of infrastructure funds on the road sourcing capital from a small investor base. Fig. 9: Investors Expected Capital Commitments to Infrastructure Funds in the Next 12 Months Compared to the Last 12 Months 31% 33% More Capital in the Next 12 Months than the Last 12 Months As such, infrastructure fund managers must continue to pay close attention to investor attitudes and key demands in order to execute a successful fundraise in the current market. During Q4 213, Preqin conducted a series of extensive interviews with 14 institutional investors in infrastructure from around the globe in order to examine their attitudes towards the asset class, as well as their outlook for 214. 36% Same Amount of Capital in the Next 12 Months than the Last 12 Months Less Capital in the Next 12 Months than the Last 12 Months Investors Infrastructure Commitments in 213/14 Source: Preqin Investor Interviews, December 213 The majority of investors surveyed remain committed to allocating new capital to the asset class in the year ahead. As demonstrated in Fig. 9, the majority (69%) of institutional investors surveyed expect to commit more or the same level of capital to private infrastructure funds in the coming 12 months when compared to the previous year. This includes a signifi cant 33% of respondents that plan to invest more capital in 214 than in the previous 12 months, which is encouraging for fund managers looking to source new investor commitments in the year ahead. Fig. 1: Investors Intentions for Their Infrastructure Allocations over the Long Term 16% 46% Increase Allocation Maintain Allocation Investors Infrastructure Allocations over the Long Term Infrastructure is still a new asset class for many investors and 72% of active investors in infrastructure have less than 5% of their total assets allocated to the asset class. As institutions become more comfortable and familiar with the risk/return potential of infrastructure funds, allocations to the space are likely to rise. The outlook for infrastructure is very positive, with a signifi cant 46% of surveyed investors planning to increase their allocation to infrastructure over the long term, while 38% plan to maintain their current level of exposure. Just 16% of surveyed investors expect to decrease their infrastructure allocation in future. 38% Decrease Allocation Source: Preqin Investor Interviews, December 213 Raising Capital for an Infrastructure Fund? Preqin s Infrastructure Online features detailed profiles for more than 2,1 active infrastructure investors, with assets under management in excess of $65tn. View detailed future investment plans, including strategy and regional preferences and the estimated number of future investments. Extensive profiles also include contact information for key decision makers, allocations, previous investments, and much more. To see how Preqin can help your fundraising efforts, please visit: www.preqin.com/fundraising 214 Preqin Ltd. / www.preqin.com 7
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