unlocking long-term investment capital for infrastructure...
TRANSCRIPT
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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.