Introduction
The demand for infrastructure as an investment is surging, and investors are reaping the benefits with a growing selection of options. Traditionally, private infrastructure funds mirrored closed-end private equity structures, limiting access for some. However, the emergence of open-ended structures is democratizing this asset class, making it more accessible to a wider range of investors.
The Rise of Private Infrastructure
Over the past decade, private infrastructure has become a star player among institutional investors. Assets under management (AUM) have skyrocketed by over 15% annually, fueled by its allure. Initially, closed-end private equity funds dominated the scene. But in recent years, the number of open-ended options has more than doubled, reflecting a significant shift.
A Look Back: The History of Private Infrastructure as an Asset Class
The story begins in 1992 with Australia’s pension system overhaul. The introduction of mandatory occupational pensions created a massive pool of capital seeking long-term investments. This coincided with the privatization of public assets like airports and power grids. These essential services, with their predictable cash flows, perfectly matched the needs of pension funds.
By the early 2000s, privatization programs were gaining momentum globally, opening doors for private investment in infrastructure. The growing project pipeline attracted large institutions seeking inflation protection, attractive returns, and portfolio diversification.
Mid-sized institutions, however, faced a challenge. Lacking the resources to directly invest in infrastructure assets, they needed alternative solutions. Enter private equity firms who launched infrastructure funds modeled after traditional private equity structures.
The Evolution of Investment Structures
Let’s delve into the differences between open-ended and closed-end funds. Open-ended funds function similarly to traditional bond or equity funds. They lack a fixed end date and continuously welcome new investors and additional capital from existing ones. They also offer regular liquidity, allowing investors to redeem their holdings for cash whenever needed. In contrast, closed-end funds raise capital for a set period, then close to new investments. The capital gets locked in until the fund’s lifespan ends, at which point it’s returned to investors.
Proponents of open-ended funds highlight their natural alignment with infrastructure’s long-term cash flow profile and investors’ long-term goals. Additionally, they offer a smoother investment experience. Investors can access a readily available pool of assets and adjust their allocations over time. Rebalancing, a crucial tool for achieving long-term goals and optimized returns, becomes effortless. Closed-end funds, on the other hand, restrict access to capital until the fund matures. This necessitates investing in multiple closed-end funds or “vintages” to maintain a desired allocation, leading to higher costs and complexities.
Open-Ended Infrastructure Funds: Democratizing Access
For decades, institutional investors have enjoyed the benefits of open-ended funds in public equities, fixed income, and private real estate. Infrastructure, however, remained an outlier, dominated by the closed-end structure familiar to private equity firms. However, with the growing recognition of infrastructure’s value within a balanced portfolio, demand surged among smaller institutions and individual investors who found closed-end structures cumbersome and expensive.
This demand birthed a new era – the rise of open-ended infrastructure funds. Prior to 2018, these options were scarce. Today, the landscape is brimming with open-ended choices, catering to a wider audience.
Open-Ended Strategies: Core, Core-Plus, and Beyond
Open-ended structures have carved out two primary niches within the market. The first caters to core or super-core strategies, focusing on lower-risk operational assets. These strategies, estimated to deliver returns in the 6-8% range, were initially positioned as fixed-income replacements in a low-interest-rate environment. However, with traditional fixed-income options offering similar yields, the risk-reward proposition for core and super-core assets is being reevaluated.
The second niche comprises core-plus strategies. These funds combine core assets with targeted improvements or new developments, aiming for higher returns in the 8-12% range. Proponents of these strategies emphasize the ability to take a long-term, strategic approach. Unburdened by the time constraints of closed-end funds, they can evaluate investments throughout an asset’s lifecycle and dedicate the necessary time for development projects, where permitting and construction can take years. This often translates to stronger income growth for investors over the long term.
The Road Ahead: A Plethora of Options
The debate surrounding open-ended versus closed-end structures will likely continue. However, one thing is undeniable: investors have more choices than ever before. Whether they opt for a single open-ended manager or a diversified portfolio encompassing both open-ended and closed-end options, the opportunities to achieve their investment goals have never been brighter.
This information is based on the articles analyzed and reported by ThePlatform’s analysts team: https://www.preqin.com/insights/research/blogs/world-economic-forum-warns-of-ai-risks-and-urges-responsible-adoption
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