Unlocking long term investment capital for infrastructure assets Ashby H B Monk Ph D Ashby H. B. Monk, Ph.D Stanford University and Oxford University June 23 rd, 2011
There is endemic short termism, which limits infrastructure investing. Average Holding Period - Selected Exchanges Source: OECD (report DAF/CA/CG(2010)12)
But certain investors are particularly well suited to long term investing.
In theory, there is plenty of long term investment capital to go around. (Note: That s actually a conservative estimate. Seriously)
But certain investors are particularly well suited to long term investing. In Perpetuity
While small, SWFs have scope to be important infrastructure investors. Institutional investor breakdown Family Offices Sovereign Wealth Funds Pension Funds Endowments & Foundations Insurance Funds Family Offices Endowments & Foundations Sovereign Wealth Funds Insurance Funds Mutual Funds Pension Funds Mutual Funds Source: World Economic Forum 6
Commodities and forex reserves are driving the growth in SWFs AUM. 6,000 5,000 Commodity Non commodity 4,000 3,000 2,000 1,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 Source: TheCityUK
A rapidly growing asset class with more new funds every year. New SWFs announced per year 22 20 18 16 14 12 10 8 6 4 2 0 Source: Oxford SWF Project
SWFs should have a unique affinity for infrastructure investments. SWFs have a unique ability to invest in infrastructure assets: High Barriers to Entry Long Term Time Horizon Illiquidity and Exit The community of sovereign funds often have the scale to minimize this as an issue. Sovereign funds have an intergenerational time horizon. No problem. Sovereign funds can hold an investment for the lf life of the asset. Not a deal breaker.
But SWFs are under allocating to illiquids and, in particular, infrastructure. 10% allocated to illiquid assets.
The Infrastructure Investment Conundrum What s preventing some long term investors, such as SWFs, from allocating more of their capital to infrastructure?
The infrastructure conundrum stems from a lack of easy access points. 3 rd party fund managers developed the infrastructure market in the 1990s. Fund managers may now be constraining i the asset class in the current decade: Mismatch in investment horizon of owner and manager. Carry compensation is increasingly unpopular in infrastructure. t Is in-sourcing the answer? Yes and No! Better alignment But bigger governance challenges.
Direct investing requires good governance and management practices. Direct investment programs have to overcome three key challenges: People: The direct investor has to be able to attract individuals that can run a direct investment t program. Process: The direct investor has to tailor its processes to the particular requirements e e of direct investment. e Politics: The direct investor has to consider the political environment inside and outside their business.
More than 25 Institutions Have Launched Direct Investment Programs Name AUM ($B) Name AUM ($B) Australia Malaysia Future Fund 72 EPF 135 QIC 56 Netherlands Aus Super 32 APG 383 Uni Super 25 PGGM 137 Brunei Saudi Arabia Brunei Investment 30 SAMA 440 Canada Singapore CDPQ 152 GIC 248 CPP 140 Temasek 146 OTPP 96 UAE bcimc 80 ADIC 875 AIMCo 70 ADIA 627 OMERS 53 QIC 600 PSP 46 United States Korea CalPERS 180 NPS 289 CalSTRS 148 Source: Collaboratory for Research on Global Projects, Stanford University
Final Thoughts Conundrum: Investors want exposure to the asset but aren t investing due to access constraints. 3 rd party model has its challenges. Direct investing is extremely difficult and resource intensive. As such, attracting capital into infrastructure will require innovative access points, vehicles and structures. The challenge for policymakers is to innovate, simplify and facilitate access. Some additional ideas: 3 rd party fund managers could extend time horizons and / or change fees. Direct investors could work with managers on club investments. Direct investors could work with other direct investors to pool resources. In sum, we need new mechanisms to better facilitate intermediation between the investor and the asset; to do this will require the commitment of all stakeholders.