Publications

Vintage funds: A look back at infrastructure fund performance
- July 1, 2018: Vol. 5, Number 7

Vintage funds: A look back at infrastructure fund performance

by Sheila Hopkins

We still think about infrastructure as being a young asset class — and in comparison to others, it still is. But we are finally reaching the point where we can look at several vintage periods and analyze how those funds performed during a variety of economic conditions. The 2005–2007 vintage is a perfect one to start with. Not many funds can claim to have been launched into one of the highest-flying of high-flying economic climates, only to quickly be in the midst of a great financial crisis. How these funds survived the crisis, both in relation to promised performance and in relation to other asset classes, has helped funds today position themselves for future downturns.

Broadly speaking, private infrastructure funds raised in the years immediately before the global financial crisis did not achieve the returns targeted by their managers. According to Cambridge Associates’ private investment database, infrastructure funds across vintage years 2005 to 2007 have delivered a pooled net internal rate of return of 6.7 percent as of third quarter 2017, falling short of the 8.0 percent to 12.0 percent range managers tend to target and investors tend to want.

As with any time period, some funds and investors did better than others. First- and second-quartile funds — or those funds that finished with an above-median net IRR each vintage year — delivered a pooled net IRR of 8.13 percent across vintage years 2005 to 2007, according to Cambridge Associates. This level of return is consistent with typical core/core-plus return targets.

Private infrastructure fund results for vintage years 2005 to 2007 are not thrilling, but, overall, they were better than several other private investment options. The global financial crisis affected all investment classes, hitting some harder than others, particularly private real estate and natural resources.

“These asset classes, which tend to be higher risk, delivered pooled net internal rates of returns of 2.1 percent and 4.7 percent, respectively,” says Kevin Rosenbaum, deputy head of capital markets research at Cambridge Associates. “The better performance achieved by infrastructure funds was due in large part to the nature of its assets, whose long-term contracted cash flows tend to be defensive.”

It is worth noting many of the funds raised during this period were the first funds of their kind investing in infrastructure, so it was not surprising that some of the underwriting assumptions were off.

“The major problem in these early funds was that so many managers had little experience as fund managers,” says Kelly DePonte, managing director at Probitas Partners.

The way deals were structured also contributed to the performance — or lack thereof — for some funds launched in the mid- to late-2000s. Many of these earlier managers came from private equity, and they structured the funds and financing the same way as for their other funds. That meant these early economic infrastructure funds suffered from overleverage and overly optimistic assumptions. Even some of the more core-like funds fell prey to easy capital.

Comparing funds launched 15 years ago with those being raised today is not really fair. A lot of learning has taken place in those years. The industry has matured considerably, and investors have a lot more data to rely on to understand manager performance. The industry might still go through some hard times during the next recession, but because we are now able to look back at what worked — and what did not — 10 years ago, it has a better chance of outperforming other asset classes, much as it did during the global financial crisis.

Sheila Hopkins is a freelance writer based in Myrtle Beach, S.C.

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