Illiquid assets

GLOBAL INVESTOR 1.15 — 49
Largely due to the current low interest rate
environment, institutional investors such
as insurers and pension funds are increasingly
moving toward allocation into longer-term
illiquid assets, in particular into infrastructure
as an asset class. This trend has been a
significant one. In fact, global infrastructure
assets under management have seen a
300% increase over the past seven years.
Investors are increasingly putting their money
into the transport, tele communications,
technology, energy and resources sectors,
and backing the large-scale construction
projects these sectors require. While not
without risk, such investment is supported by
governments and supranationals alike.
There is clear evidence that insurers and pension funds
with long maturity liabilities are increasing their asset allocation
to infrastructure as an asset class. Other categories
of investors are larger family offices and sovereign wealth
funds. The investment case is that infrastructure projects or businesses
offer long-term yields that are theoretically fairly stable
and normally can provide inflation protection. Typically, investors
are taking a seven- to ten-year view on the risk / reward of investing
in infrastructure assets, but frequently the time horizons can be
considerably longer. According to Preqin, global infrastructure
assets under management in unlisted funds are at a record high of
USD 282 billion, having increased threefold since 2007. Of the investors
surveyed by Preqin, 25% plan to invest over USD 400 million
each over the next year in infrastructure, and 90% plan to invest at
least USD 50 million. Preqin estimates that “dry powder”, i. e. uncalled
capital already committed, could be USD 107 billion, while insurance
companies are planning to increase their asset allocation to infrastructure
to 3%.
Infrastructure: The different components
Infrastructure covers a range of differing assets, but can be broadly
disaggregated into the transport sectors, telecommunications and
technology, energy, social infrastructure, and resources and waste
management. Examples in the transport sector will include the
construction of new railways / mass transit systems and trains, ports
and shipping, airports, roads, bridges and tunnels. Telecommunications
and technology investments range from relatively simple, such
as mobile phone masts and fiber-optic cable, to complex projects,
such as server or other tech cluster farms. The energy sector is very
broad, but will include conventional assets such as pipelines, storage
facilities, refineries, support infrastructure for oil and gas fields, the
nuclear sector, energy transmission systems and alternative energy
assets. There has been significant investment in alternatives such as
on- and offshore wind farms, hydroelectric systems, solar and biomass
plants. Social investments are typically defined as the construction
and maintenance of schools, universities, hospitals and prisons.
Although there is some overlap with the energy sector, resources
and waste management infrastructure includes water management
systems, sewerage, waste collection and the recycling sector.
Typical infrastructure investment vehicles
In an unlisted fund, it is normal for the general partners to manage the
infrastructure assets and to appoint management teams as relevant
to the day-to-day management of individual assets or projects. Limited
partners will have made an initial capital commitment, and capital
will be called as and when funds are invested. There is typically an
initial investment period, and if the general partner has not invested
funds prior to the maturity of this investment period, then capital
commitments are waived or the limited partners can vote on granting
an extension. There will be clear guidelines on the fund’s turnover,
on investment concentration, leverage, planned repayments to limited
partners, and how, if necessary, the limited partners can vote on
a change in asset manager or general partner. Leverage has to be
carefully monitored since funding can be at the fund level or more
normally embedded in the actual projects or assets being invested
in. Leverage levels will typically be higher than what is normally found
in the private equity industry on the assumption that cash flows have
a lower degree of volatility than that in private equity. Sources of >