Infrastructure fundraising hits a wall

Three institutional infrastructure money managers are the latest to have stopped fundraising efforts amid a drastic reversal in fortune. The infrastructure subsidiaries of Banco Santander SA, Deutsche Bank AG's RREEF Alternative Investments and ING Groep NV halted their operations as fundraising plummeted to $4 billion for the first nine months of the year, down 89% from a year earlier. In total, 25 infrastructure funds either abandoned fundraising or put it on hold for the 18-month period ended June 30, according to Preqin, a London-based research group. Ten infrastructure funds have been abandoned so far this year, according to Preqin. There is still $107.3 billion in the infrastructure market. Sources say that The Goldman Sachs Group Inc. continues activity in its $7.5 billion fund. Alinda Capital Partners is raising a second infrastructure fund, which has a $5 billion target. American International Group Inc.'s former infrastructure team, now part of Pacific Century Group, also is marketing a new infrastructure fund, Highstar Capital IV, with a $4 billion target, according to Preqin.
But in general, “fundraising over the last two years has gone from a sprint to a marathon,” said Michael Underhill, chief investment officer of Capital Innovations LLC, an infrastructure investment management firm. Fundraising has been stymied by investors' putting off committing capital despite continuing to add infrastructure allocations, either as a stand-alone asset class or part of a real asset or inflation-hedging strategy. For some institutional investors, the issue is liquidity. Their experiences with the credit crisis makes them hesitant to lock up more capital for another decade, sources said. For example, the $126.9 billion California State Teachers' Retirement System this summer created a 5% allocation to a new real-return asset class that will initially include infrastructure and inflation-linked bonds. But executives plan to take between three and five years to fill out the allocation. The $9.5 billion Los Angeles City Employees Retirement System's investment committee also is considering infrastructure as part of a real-return asset class but might not fund the allocation immediately. The pension plan's chief investment officer, Daniel Gallagher, declined to comment. Fees are another concern. In order to entice capital commitments, some managers have cut their management fees and trimmed carried interest to 10%, from 20%, Mr. Underhill said. He noted that firms with flexible fees and terms include Kohlberg Kravis Roberts & Co., which is raising the $4 billion KKR Infrastructure Fund; Blackstone Group; Brookfield Asset Management Inc.; and Zachary Hastings Alliance.

SOME FLEXIBILITY

Executives at Brookfield declined to comment about their latest infrastructure fund, Brookfield Americas Infrastructure Fund, which has a $1.5 billion target, because it is in the fundraising stage. However, the firm in general has been responding to institutional investors' requests for flexibility both in fee structure and investment type. Over the summer, Brookfield opened a $5 billion consortium-structured real estate vehicle that allows investments on a deal-by-deal basis. The firm earns fees on an investment-by-investment basis, said Denis Couture, senior vice president for corporate and international affairs. Brookfield has no consortium-style investment for infrastructure, but it does have a publicly traded vehicle, Brookfield Infrastructure Partners LP, and two other funds: a recently closed $400 million Colombian Infrastructure Fund and a planned $500 million fund that would invest in infrastructure in Peru. RREEF Infrastructure, a subsidiary of RREEF Alternative Investments, closed its U.S. infrastructure business and stopped raising money for the $500 million RREEF North America Infrastructure Fund. RREEF's first infrastructure fund started out as an open-end fund acting essentially as a bridge loan for a couple of seaport projects. When RREEF liquidated that fund to turn it into a closed-end fund at the request of new investors, many original investors took their profits and didn't recommit. However, RREEF is continuing to maintain its international infrastructure business, running a pan-European fund and the Oz funds, a series of separate accounts in Australia. “We remain fully committed to our European and Australian infrastructure platforms,” John T. Gallagher, a Deutsche Bank spokes-man, wrote in an e-mail. He declined to give the fund sizes. In August, ING Groep stopped marketing its European infrastructure fund, which had a $1.5 billion target. In a statement, ING officials noted that they were closing the fund “due to a combination of market conditions [and] concerns over achievable critical mass” for the fund, which it launched last year. Banco Santander is winding down its $2.25 billion infrastructure fund but will continue to invest assets of its first fund, which it closed in 2004. Merrill Lynch & Co. Inc. also shuttered its infrastructure business and stopped fundraising before its acquisition by Bank of America Corp. closed Jan. 1, said BofA spokeswoman Jackie Fitzgerald.
The problems that infrastructure funds face are the same that alternative managers in general are having, said Kelly DePonte, partner at Probitas Partners, a placement agency. The majority of the larger infrastructure funds are being sponsored by huge institutions, such as banks or insurance companies, that are having financial troubles of their own, he said. This is preventing them from the traditional practice of investing in their own funds, Mr. DePonte added. And some global institutional investors prefer funds raised by independent infrastructure investment management firms, according to a soon-to-be-released infrastructure investor survey by Probitas. According to the survey, 71.8% of the 160 respondents prefer independent firms, while just 8.1% favor firms that are subsidiaries of larger institutions. Also, since infrastructure is a relatively new asset class, most of the firms are new and have no real track record, Mr. DePonte said. So if a new firm stops marketing its first fund, chances are, the firm won't last. But some firms new to infrastructure have managed to cobble together track records. For example, Blackstone is using the track record of two executives it snagged from Macquarie Group, Michael Dorrell and Trent Vichie. Both are senior managing directors at Blackstone Infrastructure Partners, and Mr. Vichie is a founding partner of Blackstone's infrastructure group, which is raising a $3.3 billion fund. Some managers, such as J.P. Morgan Asset Management, are seeing success with open-end infrastructure funds. However, Mark Weisdorf, the firm's chief investment officer and managing director for global real-assets infrastructure, said that open-end funds are most suited for lower-risk investments that offer income rather than relying on capital appreciation. Riskier investments that offer profits from infrastructure construction projects are more suited to long-term private-equity-style funds that give managers time to build or improve the project, he said. But according to the Probitas survey, close to 50% of investors prefer either a 10-year private-equity-style fund or a hybrid that includes liquidity at the end of the 10-year period. Only 13.4% prefer an open-end structure, Mr. DePonte said. Some in the industry say that a good alternative would be to raise publicly traded, real-estate-investment-trust-like infrastructure funds in the United States. Larry Varellas, national managing partner for real estate and infrastructure at Deloitte Tax LLP, said that concerns from politicians and others about putting public infrastructure such as roads and bridges in private hands could be alleviated with an infrastructure REIT, though it would require a change in tax laws. Arleen Jacobius is a reporter for sister publication Pensions & Investments.