PLANSPONSOR - February/March 2019 - 55

typically carried out through private
limited partnerships in closed-end funds.
" If a fund invests in a closed-end fund,
you might make a $50 million commitment, "
Mende says. " The fund might have
a 10-year life, and, maybe at year eight, the
manager will start to look at making exits
for the fund's assets. But every fund I have
ever seen [has] extended past the expected
life span, as the asset sales are lumpy and
the timing is uncertain. As a result, we've
seen clients with smaller portfolios have
to deal with that illiquidity 12 years later. "
But in another analogy to commercial
real estate, infrastructure managers have
devised open-end funds with a perpetual
life that offers some liquidity. Mende
notes that open-end funds were recently
launched by large infrastructure managers
Blackstone, Brookfield, First State, IFM
and J.P. Morgan. " A lot of investors like
this strategy and are not left wondering
whether they are going to get liquidity in
year 10, or year 12 or later, " she says.
Liquidity is an essential consideration
for corporate defined benefit (DB)
plans that are closed or frozen. " The
longevity and liquidity needs of those
plans are very different from what they
were 10 or 15 years ago, " says Jessica Hart,
retirement practice lead at Northern
Trust Asset Management in Chicago. She
cautions: " We all went through the financial
crisis. Yes, there are open-end funds,
and they are all open-ended until they're
not. Frozen DB plans that may try to
offload their liabilities need to weigh the
liquidity premium they might earn from
a private investment versus being able to
maneuver their asset pools quickly. "
A third option for infrastructure
investment, akin to real estate investment
trusts (REITs), is funds of publicly traded
shares of companies in natural resources,
energy, railroads and other infrastructure
sectors. While private infrastructure
funds have been around for 20 years or so,
listed infrastructure strategies appeared
in the 1980s.
" Versus the broad equity market,
listed infrastructure has a lower
Infrastructure Manager Fund Raising
And 'Dry Powder' (2008 - Q2 2018)
$25 B
$50 B
$75 B
$100 B
$125 B
$150 B
$175 B
$0
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Probitas Partners, " Infrastructure Investor Trends: 2018 Survey Results "
volatility-a beta of about 0.8, " says Hart.
" That would provide defensive characteristics,
particularly in down markets. "
Northern Trust manages about $1 billion
in listed infrastructure assets.
Investors have steadily poured new
capital into infrastructure funds. The
graph above, from Probitas Partners,
a placement adviser in San Francisco,
shows incremental gains in assets raised
by the world's open-end managers from
2008-the pre-financial crisis peak-
through 2018's first half. The coming to
market of three large funds boosted the
total in 2016.
The graph also plots managers'
substantial " dry powder, " or capital yet to
be invested in productive assets.
Investors are pleased with their experience,
according to researchers at London's
Preqin, a specialist in tracking the private
markets. In a mid-year 2018 survey, the
firm reported that infrastructure funds of
vintage 2009 and later consistently generated
median net internal rates of return
(IRRs) of about 10%.
Accordingly, the Preqin researchers
added, " Ninety-three percent of institutional
investors felt that their infrastructure
fund investments had met or exceeded
their expectations over the past 12 months,
an increase from 77% in December 2015. "
For a majority of investors, however,
the prime concern is the threat to future
returns from too much new money being
drawn to infrastructure.
Mende's infrastructure primer totals
the ranges of manager performance:
From vintage years 2007 through 2015,
the top managers delivered IRRs in the
mid-teens or low 20s, while the lower
boundary ranged from 0% to 8%.
She reminds investors that infrastructure
as an asset class is still fairly
new: " The critical fundraising started in
2006 and 2007, and it still needs to be
tested by a cycle to see if it will live up to
all its claims. " -John Keefe
KEY POINTS
* Infrastructure can stand in for
fixed income in that it produces
steady returns from assets such
as toll roads, airports, natural
gas pipelines and the like.
* These services tend to have a
long life; thus, these assets are
well-suited to DB plan liabilities.
* Infrastructure has the added
advantage of withstanding
inflation, as operators can raise
their rates over time.
2017 Q2 2018
Dry Powder " Dry Powder "
Funds Raised
Funds Raised
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