CASE STUDY

Value-Add Infrastructure

Canadian Corporate Pension Plan | 2019

Engagement at a glance

An investor sought exposure to value-add infrastructure equity in Global or North America, generating at least 10% IRR net of fees.

Client-specific Concerns

This pension fund already had two infrastructure managers – one with a core/core+ style delivering a strong yield, the other with a value-add strategy. While open to a “global” strategy, this investor was also interested in North America with a view to minimising currency risk. Emerging market exposure was not desired.

Outcome

  • Comprehensive overview of the landscape uncovered 68 managers operating in the client’s target markets, which was evenly split between the global and North American category.  These included smaller niche managers alongside the global mega cap players and familiar big brands.

  • Digging into track records. These are somewhat problematic: even for the more established global infra teams, very few have actually realised their funds; the vast majority have been established since 2010 and haven’t exited all investments yet. As a result, performance data tends to be based on paper values. It is important to scrutinise these portfolios carefully during the due diligence phase.

  • Disentangling the drivers of performance. Plenty of infrastructure managers have ridden the wave of a benign macroeconomic environment and rising asset prices. Going forwards, aspects such as value creation and downside protection when underwriting will be critical to returns.

  • As the process continued, fee structures proposed by managers came into greater focus. What was interesting to note was the relatively modest fee leakage modelled by managers for their proposed strategy compared to the observed gross to net spread for previous vintages. After much probing, it was clear that some managers omitted certain costs borne by investors when disclosing the gross to net spread. We are becoming increasingly concerned about hidden fees charged by managers, particularly in the larger-cap space, where fund structures are very complex and we see a number of related party transactions between other divisions of the asset manager. As a result, gross-net spreads are much higher than anticipated and these larger funds in particular are positioned to compensate investors modestly for the complexity of the risks that they are taking.

Our specialist says

  • The value-add infrastructure space is becoming increasingly popular amongst investors, both as a diversifier to core holdings and for the higher prospective returns that the segment can offer in an era of return compression. What was interesting in this search was that each of the shortlisted managers had a different path to delivering those double digit returns – from taking some emerging market risk to acquiring smaller companies in developed markets. Each which required significant scrutiny.

}