1. Alternative Investments Portfolio Management
Infrastructure

2. Infrastructure: categories
Private investments in infrastructure projects or contracts
Risk varies by categories
Social
Regulated
Transportation
Contracted
Hospitals
Electricity
Toll roads
Communication towers
Senior homes
Gas
Tunnels
Power generation
Schools
Water
Bridges
District energy
Courthouses
Airports
Prisons
Rail Links
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3. ways to invest Can be done through direct or indirect investments
Big pension plans such as CPPIB, Teachers’ and OMERS have direct investments
Teachers’ and OMERS: UK’s High Speed One
Smaller pension plans do it through a limited partnership (LP) with an infrastructure fund manager (commingled funds)
Some infrastructure funds are publicly listed
e.g., Brookfield Infrastructure Partner L.P. (TSX listed)
ETFs – index of infrastructure management companies that are publicly traded
iShares Global Infrastructure ETF (TSX listed)
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4. returns
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5. Infrastructure Infrastructure Funds
Target returns: 10% - 18% annualized over the lock-up period
Some of the major players:
Macquarie (has been around in this field the longest)
Brookfield Asset Management (Canadian)
JP Morgan
Morgan Stanley
UBS
Goldman Sachs
GE + Credit Suisse
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6. Commingled Funds Most have minimum allocation of $10-25 million
May have as few as 8-10 projects (concentrated risk)
Use of leverage: 40% - 60% common, higher for social infrastructure (because of higher credit quality)
Fees:
Management fees - before 1.5% - 2% , now 1% - 1.5%
Carried interest – before 15% - 20% if return > 8% (industry standard), now Goldman Sachs and Macquarie have lowered their carry to 10%
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7. Commingled funds
Carried interest is typically paid when the infrastructure project is sold
Cash flow to the fund’s investors (i.e., limited partners)
What to do with the cash flow?
Closed-end structure, may not be able to reinvest in the fund
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8. commingled Funds Illiquid assets – timeline different from equities
When starting up a fund, have to raise capital
Large capital commitment per asset
Half of the portfolio can remain uninvested after two years
MER is also charged on uninvested commitments, e.g., 0.75% per annum versus 1.5% on invested commitments
Supposed to discourage manager from rushing into investments he/she may regret; search cost
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9. Commingled funds Reporting Governance Quarterly in house valuation
Macquarie - DCF model (30-40 years)
JP Morgan - DCF model (25 years)
Plus EV/EBITDA multiple analysis of similar assets (as a confirmation of DCF valuation)
Audited once a year
Governance
Funds may have an independent Board of Directors, but may also include the LPs on the board
May hold an investment for 3 to 7 years

10. Characteristics of Infrastructure Assets
Quasi-monopolistic and regulated
The high initial capital outlays act as a barrier to entry. As a result, infrastructure assets have quasi-monopolistic characteristics
Because of this and the “public good” nature of infrastructure assets, their transition to the private sector has been accompanied by a high degree of regulation and government oversight
The utility industry is a prime example of an infrastructure asset that has been privatized but remains highly regulated
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11. Characteristics of Infrastructure Assets
Demand
Relatively inelastic and have few substitutes
Stable cash flow
For the two reasons above
Enables high leverage ratios
Long-lived assets
Suits pension and endowment funds, foundations…etc.
Asset life > 50 years
Infrastructure privatization deals are also long-term, lasting anywhere from 30 to 99 years
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12. Characteristics of Infrastructure Assets
Inflation hedge
Many leases on infrastructure assets are CPI-linked
Hybrid asset
Elements of real estate, fixed income, and private equity:
Mature, government-regulated utility is analogous to fixed income
Developing infrastructure assets in India is analogous to opportunistic real estate development
Airports are common in private equity investments (buying the operating companies and improving them)
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13. Example
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14. Example
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