History of an Asset Class—see right
Multiple players and investment methods populate the
infrastructure space. They range from the traditional investment-banking model to the newer tier of investors who emphasize
their track records of fiduciary responsibility and operating
returns rather than simply their dealmaking ability.
People, Politics, and Problems—p. 53 CLICK hERE >
Infrastructure investing has not proved to be an easy proposition.
Managing assets, the inability to work collaboratively,
geographically diverse investments: All have made investing in this
sector more difficult, on average, than traditional investments.
Disappointed Americans—p. 54 CLICK hERE >
One of the greatest paradoxes of infrastructure investing is that
the place with the biggest potential—specifically, America—has
been the most disappointing.
Lessons from Abroad—p. 54 CLICK hERE >
For American politicians to understand the modern mutation of
infrastructure investing, they would be well advised to learn from
the large international entities that populate Washington.
Breaking New Ground—p. 55 CLICK hERE >
To take advantage of this burgeoning—if rocky—market,
investors are on the lookout for methods that, until now, have
Gamekeeper Turned Poacher—p. 56 CLICK hERE >
An interview with Mary Peters, the Secretary of the Department
of Transportation under President George W. Bush, on the future
of infrastructure investment—and the political roadblocks that
might hurt it.
sectors have proved anything but immune to the economic malaise,
with transport notably weak. European airports all show double-digit reductions in passenger numbers over last year. Toll road
numbers for companies in Europe and to a lesser extent in Latin
America show high single-digit declines. Where infrastructure is
less discretionary—water and waste services, for instance—the
decline is less evident.
The unhappiest picture of all is presented by publicly listed funds
and infrastructure companies. Most of these have been crushed—
bankrupt in the case of Allco Financial Group and Babcock &
Brown, and down 50% or more in the case of Macquarie’s various
funds and European infrastructure groups such as Madrid-based
Cintra and Abertis, headquartered in Barcelona. These collapses
are in large part a function of leverage—the performance of the
underlying assets appears to be respectable, but any declines
suffered are magnified on the downside by the ubiquitous poison
of leverage. There are exceptions—Ontario Teachers’ Pension
Plan, the Toronto-based C$88 billion fund, announced an 18% hit
to its assets in 2008, but a positive return from its investments in
infrastructure—but the general sense is that grim news is in the
offing as asset values begin to be marked to market. One such
harbinger is the value of one of the iconic deals of 2006, the $3.8
billion Indiana Toll Road deal done by Macquarie Infrastructure
Group (MIG) and Cintra. MIG has decided to write off 66% of the
equity value of that asset, although Cintra still maintains it on its
books at 100%. Other writedowns seem inevitable.
Investors, nonetheless, have truly embraced the sector. Initially in
Australia, Canada, and the UK, but now beyond, private investment
in public infrastructure is an accepted and discrete investment.
“I would say we reached the tipping point more than a year ago,
where infrastructure now generally is seen to be a distinct asset
class,” says Mark Weisdorf, CIO of JPMorgan Infrastructure
Investment Group in New York.
The data seem to bear this out. According to London-based research
group Preqin, 2006 saw 34 separate infrastructure funds raise $25
billion and, in 2007, that increased to 23 funds raising $36 billion.
2008 saw a drop back to 31 funds raising $29 billion but, as of the
end of April 2009, Preqin has identified 95 infrastructure funds that
are looking to raise $102 billion. While that remains aspirational, the
fact that funds are looking for new commitments when other asset
classes are dealing with redemptions tells its own positive story.
“The promise of infrastructure is that investors can get long-duration,
low-volatility, inflation-protected, low-correlated and attractive
returns,” says Kevin Greene, the ex-CEO and chairman of pensions
consultant Rogerscasey, “The issue is how to do it. In this way, I
think the infrastructure funds market looks very much like the hedge
fund market 10 years ago or the real estate market 25 years ago.”
Weisdorf believes that infrastructure would be at the very top of the
priority list for institutional investors were it not for market conditions.
“Infrastructure is an illiquid asset class and this money gets tied up
at a time when investors really are looking to increase liquidity,” he
says.The cash element has become critical as investors come to
terms with their overall portfolio structure, and it now seems evident
that existing allocations to infrastructure may suffer as investors take
marks on their positions, a process more complex than in almost
any other asset class.
The History of an Asset Class
The private sector has been investing in infrastructure for centuries.
The original turnpikes were owned by tycoons, and families like the
Rothschilds and Barings financed the 19th century railroad boom
in Britain and the U.S. Indeed, tracing the corporate genealogy of
the current JPMorgan to its beginnings, one eventually unearths
The Manhattan Dry Dock Company, founded in 1790 to build port
facilities in New York.
In the late 1980s and 1990s, a handful of banks—in particular,
Australia’s Macquarie—discerned that, by setting up funds to own
stakes in completed infrastructure projects, they could achieve
stable and debt-like returns on the equity slice. That model quickly
produced imitators looking to cash in on what now has become a
Currently, the infrastructure market is delineated by different
categories of players, with numerous subgroups within each
category. There are also different models of investment that each
group follows, all arguing the case for why, at the end of the day,
their model will deliver superior returns. There are both listed and
unlisted funds. Most of the unlisted, private funds follow a traditional
private equity style closed-end structure, albeit with a longer life than
most buyout funds, while others follow an open-ended structure