UPDATE III: March 2008 -- Several articles have appeared in the past month that cite the June 2007 PFI piece on the Rise of Infrastructure Funds:

Financial Times Analyst - Building on Strong Foundations - James Spellman
Portfolio.com - Infrastructure Investment Bubble - Kit Roane
Ken Orski's Innovation Briefs

The Collaboratory is continuing to conduct research on the universe of new infra funds and in 2008 will be devoting substantial resources to this research effort.

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UPDATE II: June 2007 -- Further research led to the publication of an article in Project Finance International. You can download the full article here.

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UPDATE: Sept. 19, 2006 -- The following post has been edited and expanded into a more comprehensive article that was published in the Sept/Oct issue of Infrastructure Journal. You can download the full article here.

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ORIGINAL POST: Mar. 22, 2006 -- Over the next decade, the number of private investment funds targeting infrastructure assets is expected to rise considerably. Indeed, in the past month alone, at least four new private infrastructure funds have been announced, ranging in size from $350M to $1B in new equity committments:

• The Carlyle Group is raising a $1B fund;
• Dubai International and HSBC are setting up a $500M fund;
• The Infrastructure Development Finance Corporation (IDFC) in India is likely to raise a second $350-450M fund;
• Macquarie Bank raised a $964M fund in a South Korean IPO that closed on March 7th.

Of the four, Macquarie is perhaps the most experienced. Across its portfolio of managed infrastructure assets, this Australian-based infrastructure giant can boast of a rate of return of 19.4% over the past 11 years. This remarkable return, earned not on a small pool of capital but on many billions of dollars of equity, may be a key reason that the other funds are trying to mimic its successes by getting into the infrastructure sector!

In addition to the lucrative financial appeal, there are a number of underlying trends that should support a rise in the formation of infrastructure funds over the next few decades:

• Demographers project more than one billion new inhabitants of our planet over the next decade; the housing and infrastructure to provide them with basic needs has been estimated to cost more than $20 Trillion,
• Developed countries face a similar, multi-trillion dollar backlog of deferred maintenance and upgrading for their public infrastructure,
• Infrastructure assets are inversely correlated to the historical returns of most other investment categories and thus they are increasingly being recognized as an ideal vehicle for the diversification of risk,
• The long-term lifecycle of infrastructure assets closely matches the long-term investment periods that pension fund managers seek for their portfolios,
• Many countries have now passed laws allowing foreign ownership of public infrastructure, which, just 20 years ago was uncommon throughout most of the world,
• As project finance slowly matures as a distinctive branch of finance, it will offer increasingly fine-tuned models and procedures for mobilizing debt and equity for major infrastructure initiatives,

Despite the attractions of the infrastructure asset class, it is not without many unique hazards, risks, and dynamics - as were identified in the background papers, presentations and discussions of the CRGP General Counsels' Roundtable. Sourcing, acquiring and managing large, complex, capital-intensive infrastructure assets is a very different game from investing in more stable government treasury bills and stock certificates.

There are few conventional fund managers who have the experience to anticipate or to manage the kinds of unique dynamics or challenges presented by private investments in infrastructure, particularily in developing countries where national governance is weak and corruption is high.

Investing in infrastructure assets requires a unique blend of strategic management skills: the ability to forge close ties with politicians, and to recognize and actively shape emergent political and social expectations.

Thus, while many factors point to a steady climb in new private infrastructure investment over the next 10 years, it seems unlikely that many conventional funds will be able to replicate Macquarie's astounding track-record. To achieve above average returns in this sector, firms will need to get beyond the belief that risks are to be identified ex-ante and managed through contracts, and they will need to become much more comfortable working closely with domain experts - engineers, sociologists, and political scientists - to actively manage technical matters and social and political conceptions.

Posted by rjorr at March 22, 2006 6:11 PM