If (as I keep saying on this blog) now is such a good time to be investing in infrastructure, why has one of the world’s biggest private equity firms pulled out of investing in it altogether?
Earlier this month, the news broke (via Private Equity News) that CVC, one of the top 10 PE firms by assets, was abandoning plans to invest in infrastructure assets. Previously, CVC had tried to set up a €2 billion fund to buy up European infrastructure, but had given up on this after failing to attract investors to put their money into it. So instead, they planned to woo investors on a deal-by-deal basis (“Psst, want to buy a water company/airport/motorway operator”? That sort of thing). But that, too, has failed, and the infrastructure team is being disbanded.
So what’s behind this? Is interest in investing in infrastructure tailing off?
Happily for the likes of me, no.
One clue might lie in the announcement last month by Barclays that it was closing down its fixed income business, including corporate bonds, and drastically scaling back its investment banking activities. This caught my eye because of one of the causes of the job cuts cited by the financial journalist Hamish McRae in his Independent column: disintermediation, that is cutting out the middleman. Investors and the businesses they invest in are relying less on banks now.
So it is in infrastructure. As pension funds and insurance companies get more and more used to investing in both new-build and already built infrastructure, so they become less inhibited about investing directly, instead of putting money into a fund whose fees will eat away at their returns. Advisory fees have been a major sticking point for these sorts of investors, many of whom have, at least since the financial crisis struck, disagreed sharply with the would-be managers of their money about what is and isn’t a reasonable fee to charge. For the Pensions Infrastructure Platform, a funds vehicle created by UK pension funds, that fee has been fixed at 50 basis points (half a percentage point).
CVC tried raising a fund (at a very difficult time, in 2008-9 in the thick of the last crisis) and that didn’t work. Switching to a deal-by-deal approach might have been superficially attractive but it also meant having to invest fewer resources. I suspect CVC was caught in the middle between a small-scale fund with limited ambitions and a giant fund that could employ dedicated investment and operations teams. Also, when it gave up on that fund, that meant it couldn’t invest the proceeds in any infrastructure acquisitions, meaning that it didn’t have a showcase of infrastructure with which to establish a track record. CVC does have some infrastructure corporate assets, but they were acquired under a non-specialised investment mandate, so it’s not the same.
Meanwhile, other funds are managing to raise money – not all pension funds and insurers have the scale to do direct investing. Antin Infrastructure this week announced it had raised €2 billion for its second infrastructure fund, also focusing on Europe. European secondary (already built and up and running) infrastructure is a very competitive market, but Antin had the pedigree of a first fund to help it.