unlocking long-term investment capital for infrastructure...

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2011/FMP/CON/012 Session 5

Unlocking Long-Term Investment Capital for Infrastructure Assets

Submitted by: Stanford University, Oxford University

Conference on the Framework and Options for Public and Private Financing of

Infrastructure Washington, D.C., United States

22-23 June 2011

Unlocking long‐term investment capital for infrastructure assets

Ashby H B Monk Ph DAshby H. B. Monk, Ph.DStanford University and Oxford University

June 23rd, 2011

There is endemic short‐termism, which limits infrastructure investing.

Average Holding Period - Selected Exchangesg g g

Source: OECD (report DAF/CA/CG(2010)12)

But certain investors are particularly well‐suited to long‐term investing. 

In theory, there is plenty of long‐term investment capital to go around. 

(Note: That’s actually a conservative estimate. Seriously)

But certain investors are particularly well‐suited to long‐term investing. 

“In Perpetuity”

While small, SWFs have scope to be important infrastructure investors. 

Family Offices Sovereign Wealth 

Institutional investor breakdown

Family OfficesFunds

Endowments & Foundations

Insurance FundsPension Funds

Family Offices

Endowments & Foundations

Sovereign Wealth Funds

Insurance Funds

Mutual Funds

Pension Funds

Mutual Funds

Source: World Economic Forum 6

Commodities and forex reserves are driving the growth in SWFs’ AUM. 

6,000 

4,000 

5,000 

Commodity Non‐commodity

2,000 

3,000 

1,000 

‐

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012

Source: TheCityUK

A rapidly growing asset class with more new funds every year. 

N SWF d

20

22

New SWFs announced per year

14

16

18

10

12

14

4

6

8

0

2

Source: Oxford SWF Project

SWFs should have a unique affinity for infrastructure investments. 

SWFs have a unique ability to invest in infrastructure assets:

High High The community of sovereign funds g

Barriers to Entry

gBarriers to 

Entry

goften have the scale to minimize this as 

an issue. 

Long‐Term Time 

Horizon

Long‐Term Time 

Horizon

Sovereign funds have an 

intergenerational time horizon. No 

problem. 

IlliquidityIlliquiditySovereign funds can hold an investment f h l f f h

Illiquidity and ExitIlliquidity and Exit

for the life of the asset. Not a deal 

breaker. 

But SWFs are under‐allocating to illiquids and, in particular, infrastructure. 

“10% allocated to illiquid assets.”

The Infrastructure Investment Conundrum

What’s preventing some long‐term investors, such as 

SWFs, from allocating more of their capital to infrastructure?  

The infrastructure conundrum stems from a lack of easy access points. 

• 3rd party fund managers developed the infrastructure market in the 1990s.

F d b t i i• Fund managers may now be constraining the asset class in the current decade:

• Mismatch in investment horizon ofMismatch in investment horizon of owner and manager.

• ‘Carry’ compensation is increasingly l i i f t tunpopular in infrastructure.

• Is in-sourcing the answer? Yes and No!

• Better alignment

• But bigger governance challenges. gg g g

Direct investing requires good governance and management practices. 

Direct investment programs have to overcome three key challenges:

• People: The direct investor has to be able to attract individuals that can di t i t trun a direct investment program.

• Process: The direct investor has to tailor its processes to the particular requirements of direct investment. equ e e s o d ec es e

• Politics: The direct investor has to consider the political environment inside and outside their business.

More than 25 Institutions Have Launched Direct Investment Programs

AUM ($B) AUM ($B)Australia Malaysia

Future Fund 72 EPF 135QIC 6 N h l d

NameName

QIC 56 NetherlandsAus Super 32 APG 383Uni Super 25 PGGM 137

Brunei Saudi ArabiaBrunei Saudi ArabiaBrunei Investment 30 SAMA 440

Canada SingaporeCDPQ 152 GIC 248CPP 140 Temasek 146OTPP 96 UAEbcIMC 80 ADIC 875AIMCo 70 ADIA 627AIMCo 70 ADIA 627OMERS 53 QIC 600PSP 46 United States

Korea CalPERS 180NPS 289 CalSTRS 148

Source: Collaboratory for Research on Global Projects, Stanford University

Final Thoughts

• Conundrum: Investors want exposure to the asset but aren’t investing due toConundrum: Investors want exposure to the asset but aren t investing due to access constraints. • 3rd party model has its challenges.• Direct investing is extremely difficult and resource intensive.

• As such, attracting capital into infrastructure will require innovative access points, vehicles and structures.

• The challenge for policymakers is to innovate, simplify and facilitate access.

• Some additional ideas:• 3rd party fund managers could extend time horizons and / or change fees. • Direct investors could work with managers on ‘club investments’. • Direct investors could work with other direct investors to pool resources.

• In sum, we need new mechanisms to better facilitate intermediation between the investor and the asset; to do this will require the commitment of all stakeholdersstakeholders.