The New Infrastructure:

a real asset class emerges

Authors 1. Introduction
Philip Borel, Editor in Chief
Cezary Podkul, Editor,
InfrastructureInvestor.com At the moment, market professionals operating in infrastructure finance and
Leo De Bever, CEO of investment globally have to concentrate on the implications of the financial crisis
Alberta Investment and its broader economic sequel. But despite the enormity of the current
Management Corporation difficulties, infrastructure remains a market marked by a profound sense of
(AIMCo) expectation and a community [of funds, developers, financiers and advisers] each
possessed with great optimism for the future.
This positive sentiment is easily explained. Mature as well as emerging economies
are suffering from an acute shortage of adequate infrastructure. Governments on
all continents recognise the problem, but they also recognise that on their own,
they will not be able to provide what is needed. Both in terms of funding and
delivery, the public sector alone cannot take on the myriad projects that must be
executed if the world economy is to continue to prosper over the long term. For the
private sector, therein lies the opportunity; and the private sector is preparing to
embrace it fully.
At the same time institutional investors are attracted to an asset class that is not
only a valuable diversifier capable of delivering meaningful risk-adjusted returns
over the long term but also one that is deeply rooted in every economy around the
world. As many investors remark, the great thing about infrastructure assets is
that they’re real. And today, more than ever, people like that.

Contents General government gross fixed capital formation, 1990–2005

1. Introduction ..................1 (% of total government outlay) fig.1
1.1 A historic demand-
supply imbalance ........2
2. The upcoming ..............4 10.0
infrastructure boom: 9.5
the institutional 9.0
investor’s view
Total OECD outlays

8.5

2.1 Public versus ..............4 8.0

private ownership 7.5
7.0
2.2 General perspectives ..4
6.5
2.3 Regulation....................5 6.0
2.4 Future opportunities....6 5.5
5.0
2.5 Pitfalls and risks..........7 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
3. Infrastructure’s ............8 Source: OECD.
long leap forward
3.1 Getting crowded ..........8
3.2 Going private..............10
3.3 Finding funds ............11
4. Notes from the ............13
front line

1
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

A historic demand-supply imbalance

Among fund managers, institutional investors, debt providers, developers and
contstruction specialists, a consensus is taking shape that infrastructure as an
asset class has reached a new stage in its development. For existing assets this
relates to the need for returns to derive not just from financial engineering but also
from upgrading the assets themselves in order to enhance returns. And for new
assets it relates to who resides in the syndicate of investors – besides the financing
structure itself - as well as the scope and scale of the asset under development.

The key players in the emergence of infrastructure fig.2

Asset users Investment banks

Increasingly, users are prepared Deal origination
to pay for guaranteed, Debt finance
improved access Equity raisings

Fund managers Investors

Equity raisings Infrastructure Demand for long-dated,
Fund and operational investment stable return assets
management skills

Asset creators Asset managers

Governments and firms Asset managers bring
creation of assets for operational skills that improve
investment quality of service

Source: First State Investments

Many practitioners also believe that the current lack of leverage is actually a good
thing for the asset class. There is a widely shared view that infrastructure has
been over leveraged in the past, and the current absence of liquidity will oblige
buyers to be more prudent in financing assets. It will also spur them to focus more
on enhancing the performance and value of the asset.

Infrastructure risk and reward fig.3

25
Private equity
20
Return (%)

15
Public real estate
Hedge funds
Social and Economic infrastructure
10 regulated
infrastructure
Public equity
5 Fixed income

0
0 5 10 15 20 25
Risk (annual s.d.)
Sources: Barclays, MSCI Barra, Lehman Brothers, IPD, EPRA/NAREIR, UBS, Credit Suisse/Tremont, Hedge Fund Research, Thompson Financial,
Cambridge Associates, Economy.com and Datastream, RREEF.

Meanwhile, liquidity issues are being addressed. According to project finance

specialists, banks are soliciting pension funds to fill the gap left by their diminished
underwriting capacity. Pension funds could soon start to invest in tranches of debt
directly, especially if they get comfortable with the idea of making capital commitments
to projects directly rather than as investors in a traditional fund structure.

2
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

To be sure, the availability of debt finance isn’t the only constraint facing
infrastructure at the moment. Given the scale of the demand-supply imbalance,
equity capital will also remain at a premium for some time. As a result of the
financial markets dislocation, the fundraising cycle is going to be longer than it
has been in recent years, and equity capital earmarked for infrastructure
investment will therefore accumulate more slowly than the need for it demands.

Global infrastructure fundraising – closed-end funds, 2004–08 fig.4

g ,
40

35 34.3

30

25
$ billions

21.5
20 17.9

15

10
5.2
5
2.4

0
2004 2005 2006 2007 YTD
September 2008
Source: Probitas Partners, October 2008.

For those institutions willing and able to invest right now, the relative dearth of
available funding looks set to translate into attractive investment returns. In the
following article, Leo de Bever, CEO of Alberta Investment Management
Corporation (AIMCo) in Edmonton and one of the world’s foremost authorities on
infrastructure investment, sets out his views on what lies in store for institutions
aiming to play a role in the asset class going forward. Here is just one seasoned
investor eagerly embracing the emergence of infrastructure as a distinct new
asset class.

3
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

2. The upcoming infrastructure boom: the

institutional investor’s view
By Leo de Bever, Alberta Investment Management Corp.*
Public versus private ownership
Infrastructure is often considered to be a government responsibility. However, as
the ageing baby boomer population starts to strain public health and retirement
support programmes, cost of service will increasingly be seen as more important
than ownership and operational control. The case for public financing often rests
on lower cost of capital, but few governments are organised to take investment
risks, and private operators can often make do with less capital and get the job
done faster.
Public or private ownership is often an accident of history. In the western
Canadian province of Alberta electricity transmission has been privately owned
whereas in the central province of in Ontario it has always been publicly
controlled. The author’s involvement in an attempt to privatise Ontario’s power
grid failed as the provincial government worried the actual fixed assets were
viewed as the ‘crown jewels’ among public assets. The same transaction was also
hampered by the recurring theme of labour unions that equated a change from
public to private ownership as a prelude to job reduction. In this case the affected
unions were in favour, but the Canadian labour movement was opposed. Smart
private companies take care of their skilled labour force, and smart unions know
that the greatest source of job security is efficiency. Moreover, there are very few
jobs of any kind in an infrastructure project that does not get built.
In order for private infrastructure investors and operators to be the preferred
alternative, they need to demonstrate the same long-term focus as their clients,
minimise financial intermediation costs, and remember the original premise of
stable real returns with moderate risk.

General perspectives
The natural owner of an infrastructure asset is a pension or endowment fund that
intends to hold the asset indefinitely. Funding vehicles with a limited lifespan have
an inherent need to crystallise value by creating a sale transaction. That tension
can exist within a pension fund as well. It is baffling that management boards
insist on selling assets to establish value when the obvious result is a loss of
ownership of a good asset without having a superior substitute.
Like any other economic activity, infrastructure management should be structured
to become more cost-efficient over time. A big part of net return is the high cost of
financial intermediation. Many infrastructure funds have multiple and opaque
layers of fees and charges. The model is patterned after private equity, despite
much lower expected returns. The author once suggested to the head of a large
infrastructure bank that doubling transaction sizes and halving fees would make
the model more sustainable and leave his bank no worse off. He thought about it
and said that he preferred doubling transaction sizes, keeping fees the same and
making twice as much.

4
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

For many years, an uncritical flood of money into infrastructure proved halving
fees as the wrong strategy. That may be about to change because lower gross
returns do not price in much for risk and illiquidity. Smart investors should have
less tolerance for high financial intermediation costs. Moreover, the supply of
inexperienced new institutional investors is running out.
When pension funds and institutions started investing in these assets in the 1990s
returns were high because the market was illiquid and inefficient. As institutional
interest gave rise to more aggressive pricing, expected returns were maintained by
increasing debt/equity: most projects have proclaimed a headline return on equity
of around 14 percent, but over the years the leverage needed to get there has
probably doubled.
The justification has been that returns are so stable that increasing debt poses no
material incremental risk. That is mostly nonsense. Leverage may improve the return
on equity, but it typically reduces the riskadjusted rate of return. Debt is needed when
investors are capital constrained (the typical retail investor fund) but not when they
are risk-constrained (the typical pension case). Including a highly levered
infrastructure asset in a diversified stock-bond asset mix is counterproductive since
the debt typically has a higher yield than the bonds in the portfolio.
Governments should overcome their natural conservatism and embrace innovation
from private investors looking for a good return. The author once teamed up with an
engineering firm, in an efficient and quick fashion, to make good on a Canadian
government promise to provide water and sewerage installations to remote Inuit
settlements. The project set out to construct the facilities quickly using prefabricated
standard building parts. The idea was that pension fund investors would be repaid
over 20 years. However, it was all a bit too novel, the project was turned down, and
construction was delayed. The consequence was that a few years later a whole
community fell ill because of poor sanitation and they had to be airlifted out.

Regulation
Infrastructure assets are often quasi-monopolies, so protection of both investors and
users requires regulation, the threat of regulation, or a detailed performance contract.
Investors must get a return on capital that is competitive with what they could get
elsewhere, and there must be incentives to minimise the cost of a defined level of service.
Fickle regulation and protection of contracts are the biggest risks in infrastructure:
the governments or regulators that set the initial rules may be replaced with others
that have different ideas. Maintaining balance between many users who are also
voters, and a few faceless investors can be a challenge however.
Governments should appoint and pay regulators to have a long-term global capital
markets perspective. Local regulation often involves lawyers and expert witnesses
who view regulation as a zero-sum game. This local approach lacks a global
perspective on what is a fair return on capital and it does not always consider the
long-term damage from erratic regulation in the terms of capital access.

5
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

Together with three investment partners, the author learned about regulatory risk the
hard way after acquiring an Alberta transmission grid for Ontario Teachers’ Pension
Plan. The regulator ruled in the next rate review that the fund deserved a lower rate of
return than the other three partners because pension funds do not pay corporate
income tax. That decision was both myopic and wrongheaded. Myopic because while it
is true that pension funds do not pay corporate income tax, they do not benefit from
corporate tax credits and capital gains treatment enjoyed by other investors. The
regulator’s approach was wrongheaded because it triggered a predictable response:
the sale of the transmission grid stake to a non-pension investor. The net effect was to
exclude one of the largest pools of capital from the regulated energy sector in Alberta.
The best regulatory regime for investors and rate payers has been in the UK where
predictable regulation of water and energy assets has reduced the risk margin for
regulatory risk to where it may reflect a false sense of security, reminiscent of that
of overly narrow credit spreads.
Toll roads are often governed by performance contracts. In such cases, risk comes
from conditions that are so favourable to investors that they eventually invite
opposition, no matter how justifiable the original terms may have been. Toronto’s
407 Electronic Toll Road privatised in 1999 is a case in point. At the time of sale,
investors were seen as having paid too much for a very risky bet that Toronto
drivers would pay tolls to save time, despite a 99-year contract and broad latitude
to set tolls. Debt financing was initially hard to come by, but after negotiating a
very attractive index- linked bond the Toronto 407 project succeeded.
However, when the road became an operational success general sentiment
considered that the project was ‘given away’. A subsequent government tried to
repudiate the sale agreement, but the courts sensibly decided that a contract was
a contract. The lesson: governments and investors alike are better off to settle on
a lower initial price when risks are great, and to strike a bargain that can be
adjusted symmetrically in light of experience.

Future opportunities
After 25 years of spectacular returns on stock and bond risk, and ignoring a few
zigs and zags along the way, many investors discovered that risk has a return
most of the time because occasionally there are years like 2007 and 2008.
Listed infrastructure funds with excessive financial leverage and lack of
transparency in governance have seen their value evaporate, and by one estimate,
a trillion dollars of infrastructure debt is sitting on balance sheets that are
desperately in need of cash. This is creating opportunities in infrastructure debt at
least as good as future equity returns.
An asset price collapse that started with over-consumption should result in higher
personal savings. The prospect of lower future returns should wake up retail
investors in mutual funds paying 2–3 percent a year in management fees. A bigger
supply of private savings should make it easier to fund infrastructure through
private vehicles for an enterprise return somewhere between stocks and bonds.
Pension plan investors in infrastructure funds do better than retail investors. The
infrastructure investor with the lowest costs invests directly or alongside infrastructure
funds. Capacity for direct transactions is limited to a few large institutions and some of
the sovereign wealth funds. There is considerable scope to collaborate on direct
transactions in ‘club deals’ although these arrangements are difficult unless interests are
well aligned and the decision-making process is efficient and delegated to management.

6
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

Pitfalls and risks

The first 20 years of large-scale institutional investing in infrastructure has yielded many
lessons. Still, take it as given that the future will bring novel ways for governments and
infrastructure funds to repeat old mistakes and make a fundamentally boring asset
class unattractive through weak regulation and high financial intermediation costs.
In the search for good opportunities the concept of what is infrastructure is
becoming stretched to include assets or projects that have the physical appearance
of infrastructure, but lack infrastructure economics. Infrastructure returns are
stable not because of the asset, but because of contracts and regulatory conditions.
A power plant with a 25-year availability-based contract to produce power is
infrastructure. A plant supplying kilowatts to an electricity grid, at the current price,
is a private equity project with huge capital and commodity risks.
Technological risk may take on new significance as society comes up with new ways
of dealing with problems in energy and transport. A community that desperately
needs power must find someone willing to build it based on a 50-year useful life of
the asset. How much sharing of sunk costs should be built into the contract to make
sure that distributed generation (solar, wind, low depth geothermal) obviates the
need for this plant in 25 years? There is a similar issue emerging in coal-plant
contracts that never contemplated the concept of carbon pricing.
Traditionally, it has been assumed that technology risk in infrastructure is low. Yet,
if in 1903 no-one saw that a bit of tinkering with horseless carriages and bi-planes
would eventually require massive investments in roads and airports, what
developments are not foreseen today that could make those facilities obsolete?
*: Leo de Bever is the inaugural CEO of Alberta Investment Management Corporation (AIMCo) in
Edmonton, Canada. AIMCo was set up in 2008 as a Crown corporation to manage C$70 billion in
provincial pension and endowment assets. Leo has over 30 years of experience in public and private
organisations. He started his career at the Bank of Canada in Ottawa. He became interested in
infrastructure as a useful asset class to match inflation-sensitive pension obligations while developing
a risk-based approach to investing at Ontario Teachers’ Pension Plan in Toronto. His article first
appeared in the seminal new book Investing in Infrastructure, published by PEI in January 2009.

To purchase Investing in Infrastructure or for more information,

go to www.peimedia/investingininfra

7
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

3. Infrastructure’s long leap forward

2008 will be remembered as the year that infrastructure proved its resilience
to investors worldwide. Even tougher times may be ahead, though few doubt
the long-term viability of the asset class, writes Cezary Podkul

A memorable passage from Barbarians at the Gate, the famed book that logged
the trials and tribulations of Henry Kravis’s bid for RJR Nabisco in the late 80s,
helps put 2008 in perspective for many infrastructure investors: “‘So this is what
it’s come to,’ he thought. Every investment banker with an extra nickel in his
pocket thinks he ought to go into LBOs. After five years of steadily mounting
competition, Kravis was sick of it.”
In 2008, as Kravis’s firm Kohlberg Kravis Roberts made plans for a debut $4 billion
infrastructure fund, many established managers in the space undoubtedly found
themselves thinking similar sentiments.
KKR’s bold plan was just one of the ways in which the asset class showed its
potential for resilience during a year when $16.3 trillion of global stock market
value vanished. In 2008, the asset class became more crowded, but the size of the
pie continued to expand as infrastructure investors old and new dived into
emerging markets in pursuit of fresh opportunities. The long-awaited torrent of
public-to-private deal flow did not materialise, but deleveraging pressures at least
kept GPs busy. And while fundraising slowed to a trickle in the fourth quarter,
market sources say LPs overwhelmingly remain committed to the asset class.
Market participants predict that emerging market premiums will be competed
away, more privately-held infrastructure assets will come to market and
fundraising will regain strength. Whether this will happen sooner rather than later
is anybody’s guess, but after a year like 2008, the worst case is the new base case.

Getting crowded
Last year, the asset class continued to gain popularity with established private equity
heavyweights. Just a few months after KKR announced it had hired former Lazard
banker George Bilicic to head its infrastructure initiative [he subsequently moved back to
Lazard in a different role], Infrastructure Investor broke the news that New York
alternatives giant The Blackstone Group had hired Macquarie Capital’s Trent Vichie to do
the same. Nordic buyout house EQT closed its debut infrastructure fund on ¤1.2 billion,
and a flurry of investment banks also announced fund closings – including Morgan
Stanley and UBS – while others, such as BNP Paribas, announced large-scale
investments in infrastructure funds.

“Into the second half of next year, as the pension plans start to
come out of the paralysis that’s the result of the current
malaise, infrastructure will come firmly back onto the agenda”
Collectively, by year-end 2008, placement agent Probitas Partners estimated there were
77 infrastructure funds worldwide seeking to raise more than $92 billion of capital. And
in January 2009, Morgan Stanley estimated that there was $180 billion of private capital
globally dedicated to infrastructure.

8
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

By the end of last year, Prequin estimated that private equity firms worldwide had about
$1 trillion in uncalled capital available to invest. So infrastructure may still be in its
infancy when compared with private equity, but it’s growing up fast.

“I think the asset class definitely became more crowded in 2008. I think that’s a long-
term trend, particularly in the US, where it’s still an asset class really in its infancy. And
so I would expect it to become more crowded over time and maybe in 10 years level off a
bit,” says Felicity Gates, head of Citi Infrastructure Investors.

While infrastructure was one of the top destinations for buyout funds in 2008,
emerging markets were one of the top destinations for existing GPs in the asset
class. Challenger, Macquarie and 3i were among established players which looked to
expand their infrastructure platforms deeper into emerging markets, while emerging
markets-focused private equity firms like Actis made plans for new additional
infrastructure funds.

By year-end 2008, 25 of the 77 funds on Probitas’s list were focused on the emerging
markets, collectively seeking $16.9 billion of capital.

Not all those funds will get raised, cautions Saji Anantakrishnan, a director at
Challenger Emerging Markets Infrastructure Fund, which launched in June 2008 and is
targeting $1.2 billion in commitments.

“First-time fund managers who have jumped onto the emerging markets theme with
limited experience in either infrastructure or emerging markets will struggle,”
Anantakrishnan said.

Still, he foresees that more GPs will turn to the emerging markets in an effort to
diversify their geographic exposure and earn a premium over other, more competitive
markets. It’s a development he likens to the 2004 migration of GPs from Australia to
Europe, which at the time had not seen significant investment by infrastructure funds.
Australia’s Macquarie launched the Macquarie European Infrastructure Fund I and soon
a flurry of European country-focused funds followed. Before long, the 200 to 300 basis
point spread between investing in Australian and European infrastructure got eroded.

The same is likely to happen with emerging markets. “The premium is going to get
competed away fairly rapidly,” predicts Deepak Bagla, a director at 3i, which manages
the $1.2 billion 3i India Infrastructure Fund.

Bagla believes that government de-risking of projects and the entry of new competitors
will soon wipe away the estimated 3 to 5 percent premium for investing in Indian
infrastructure.

Despite the entry of new competitors, no GP interviewed by Infrastructure Investor

thought the asset class is getting too crowded for its own good.

“At the end of the day, I think when you compare the amount of capital that’s been raised
against the amount of capital that needs to be invested, it’s clear that there is ample
room for other people to be active in the sector and provide decent returns for their
investors,” says Adebayo Ogunlesi, chairman of Global Infrastructure Partners, which
held its final close on $5.64 billion in March 2008.

9
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

“At the end of the day, I think the amount of capital that’s raised, arranged against the
amount of capital that’s to be invested, suggests that there is ample room for other
people to be active in the sector and provide decent returns for their investors,” says
Adebayo Ogunlesi, head of Global Infrastructure Partners (GIP), which held its final close
on $5.64 billion in May 2008.

Ogunlesi: ample
room for more funds

Going private
On the deal front, despite highly visible asset auctions by a handful of government
entities worldwide, infrastructure deal-making continued to be dominated by private-to-
private deal flow.

Growing fiscal pressures on governments from the economic downturn did not
materialise in the long-anticipated flood of public-to-private deals in 2008. There were
some interesting developments, such as the City of Chicago’s long-term lease of Midway
Airport and on-street parking operations for $2.5 billion and $1.16 billion, respectively;
the state of Pennsylvania’s unsuccessful attempt to lease its turnpike; and Singapore’s
privatisation of all three of the power companies in its portfolio for S$11.7 billion. For the
most part, though, despite dwindling tax revenues and rising liabilities, government
entities continued to hang on to their essential infrastructure assets.

Disappointing? Yes. Surprising? No.

“I think people are overly optimistic about how long it takes for any of these things to get
done. The Chicago Skyway deal was eight years in the making. The legislation that
allowed the lease of Midway Airport was approved in the late 90s. So that’s a deal that
took more than 10 years. These are not simple transactions,” Gates points out.

Under Gates’s leadership, Citi won the bidding for both Chicago’s Midway Airport and the
Pennsylvania Turnpike. But she sees that as more of a confluence of factors rather than
the beginning of a trend.

“Anyone who expects the [public-to-private] floodgates to open is being very optimistic,”
she adds.

10
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

In its place, deleveraging pressures on existing infrastructure managers produced a

flurry of private-to-private deals - especially in the listed infrastructure fund space. As
share prices for many of the Macquarie-, Babcock- and Challenger-managed
infrastructure funds tumbled anywhere from 50 percent to 95 percent, many of their
satellite funds put assets up for sale in order to raise cash to shore up their balance
sheets, pay down debt and buy back shares. Babcock & Brown Power, loaded with
A$3.8 billion of debt (as of October 2008), put all its assets up for sale.

“The most striking thing [in 2008] was the collapse of what used to be the listed
infrastructure model in Australia,” observes Ogunlesi. “I don’t think it will come back. I
don’t think it was a sustainable model.”

In the meanwhile, he is positioning GIP to take advantage of the collapse. In the fourth
quarter of 2008, the firm opened a Sydney office to run the rule over assets coming to
market from listed funds, among other opportunities in the region.

“Anyone who expects the public-to-private floodgates to open is

being very optimistic.”
The UBS International Infrastructure Fund, which last year held a final close on $1.5
billion, has likewise looked at a number of listed assets coming to market from various
Babcock & Brown-managed entities. Steve Jacobs, UBS’s head of infrastructure, sees
that as only the beginning.

“There’s an awful lot of stressed and distressed sellers out there at the moment and I
think for our fund and probably for many of our peers, in the next 12 to 24 months, that’s
where a significant amount of the deal flow will come from,” Jacobs says.

Gates agrees. She believes the cycle of stressed and distressed sales is already past its
beginning stages – “somewhere between the beginning and the middle” – but will
continue to provide investors with deal flow in the near term.

In the long term, though, investors have not given up on the prospect of more public
infrastructure assets coming to market.

“I think eventually it will happen,” predicts Ogunlesi. “Whether this year, next year or the
year after, I don't pretend to know. It’s the US where there’s been the most market
resistance.”

“We’re still 24 to 36 months from seeing a lot of that deal flow come through on the
public sector side,” Jacobs estimates.

Finding funds
Last year also marked an inflection point for infrastructure fundraising. Until 2008, GPs
had enjoyed steadily increasing fundraising success, going from a mere $2.4 billion
raised globally in 2004 to $34.3 billion in 2007. In 2008, that record high tumbled 28
percent to $24.7 billion, according to data from Probitas.

11
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

But the slowdown wasn’t spread evenly throughout the year. Nearly $21.7 billion of the
year-end total was raised in the first three quarters of the year.

“Fundraising went dead in the fourth quarter basically because most LPs were frozen in
place trying to figure out what was happening with their overall portfolios,” explains
Kelly DePonte, a partner at Probitas.

Nor was the fourth-quarter slowdown uniform across all sectors of infrastructure.
Energy funds continued to see commitments trickle in, with Texas-based Quintana
Capital, Quantum Energy and Kayne Anderson, among others, making progress toward
commitments totaling $250 million, $2 billion and $700 million, respectively.

“The fall-off in energy prices piqued the interest of a number of LPs. It is tough to time
any market and a good number of LPs who felt like energy was too rich became focused
on it and thought, ‘maybe now it is not so rich, maybe the dislocation in the markets is
such that we can part some capital in the space,’” observes Terence Crikelair of
Greenwich, Connecticut-based Champlain Advisors, a placement agent active in the
energy sector.

Looking forward, all placement agents and GPs interviewed by Infrastructure Investor
believe the fundraising climate will remain difficult in the near future. But the good news
is that LPs generally understand infrastructure much better than they used to and are
giving it more thought in the current environment.

“Infrastructure funds generally produce inflation-hedged current yield, downside

protection, and uncorrelated returns. Each of these characteristics became more
valuable in the second half of 2008 when LPs saw the public markets hit hard and
private equity distributions dry up at the same time,” says Brian Newman of CP Eaton
Partners, a placement agent active in real asset strategies like infrastructure.

This gives some GPs added hope that, once LPs are ready to open their wallets again,
infrastructure will be one of the first places they look to make new allocations.

“I don’t see significant capital being raised in the short term, probably six to nine
months. But into the second half of next year, as the pension plans start to come out of
the paralysis that’s the result of the current malaise, I think infrastructure will come
firmly back onto the agenda,” says Ben Heap, head of fundraising for the UBS
International Infrastructure Fund.

12
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

4. Notes from the front line “The lack of leverage is

actually a good thing”
In February, PEI held its third European Infrastructure Investor Forum in
Berlin. Here are the ten key industry insights the gathering produced.

One often wonders whether it's better to attend conferences during booms or
busts. PEI’s third annual Infrastructure Investor Forum in Berlin in February was a
solid argument for the latter.
The more than 200 delegates gathered at the event spoke honestly about the
problems they're facing during the downturn and voiced frustration at the lack of
good solutions. The result was a degree of audience participation, brainstorming
and probing debate rarely seen on the conference circuit.
For those unable to make it, here are the top ten take-away from the event.
1. There is growing consensus among infrastructure investment professionals that
the asset class has reached a new stage in its development: one in which
owners of infrastructure assets must derive their returns not from financial
engineering but making operational improvements to their assets. In Berlin,
CVC Capital Partners' head of infrastructure Stephen Vineburg was among
those making this point very forcefully.
2. An almost shocking comment to hear from fund managers who are learning to
live with the world's new scarcity of debt: the lack of leverage is actually a good
thing for the asset class. Many believe that infrastructure has been
overleveraged in the past, and the current absence of liquidity will teach
infrastructure investors to be more conservative in financing assets. It will also
teach them to focus more on the operations side of the business.
3. Banks are seeking to get more pension investors involved in filling the gap left
by their diminished underwriting capacity. Several banks confessed to having
approached large pension investors about investing directly in tranches of debt -
an idea that may get more traction as more pensions think about making
investments directly rather than as investors in a traditional fund structure.
4. If any party in a syndicate of several banks doesn't get what it wants and drops
out, the deal is more likely than ever to fall apart. The marginal bank on the deal
is "the guy who completes the puzzle" and has more leverage than ever
(absolutely no pun intended). Solution: borrowers should keep the dialogue as
open as possible, advised James Miller, head of Secured Debt Markets at RBS
Global Banking and Markets in London.
5. In trying to secure bank financing for a deal, it is a good idea to bring in a
workout consultant before the transaction closes. This will make the lending
parties feel more comfortable about inking the deal. It's a strategy that has
worked well for First Reserve, Tom Sikorski, a managing director at the firm,
told delegates.

13
www.infrastructureinvestor.com
 The New Infrastructure: a real asset class emerges

6. Sponsors continue to consider all-equity financings in the current market. One

delegate commented in front of the whole conference that, at below 35 percent
to 40 percent debt financing, his IRRs are more attractive on an all-equity basis,
given the current cost of debt. Jim Wilmott of Morgan Stanley shared with the
audience that when his firm clinched the $1.16 billion Chicago parking meters
deal last December, it could not find an attractive enough financing package
and decided that going all equity for the asset made sense.
7. The fundraising cycle is going to be much longer than it has been in recent
years. Chief reason: investors used to want to want to be the first ones to
commit to infrastructure funds but now their preference has shifted to being
additional investors after a fund has reached first close, according to placement
agents present at the conference.
8. Investors are well-aware that they have more power in negotiating fees and they
intend to use it in this difficult fundraising environment. Talk of lower fees,
reduced catch-ups and other more LP-friendly fund terms and conditions
dominated the end-investor panels at the Forum.
9. All the talk of infrastructure stimulus by governments worldwide is welcoming,
but few investors believe it will have a significant impact on the way they do
business. The consensus is that the impact is more psychological and feel-good
than anything tangible.
10. The traditional greenfield-brownfield distinction is blurring with respect to
geographic breakdown. Emerging markets-focused investors such as Actis
said that they are beginning to see attractive brownfield assets up for sale in
their core geographies; OECD and other developed-market investors on the
other hand are beginning to note more attractive greenfield opportunities in
their countries. An exception to this trend: India. "India has no infrastructure -
it has to be built," Krishna Kumar of IL&FS Investment Management
reminded delegates.

14
www.infrastructureinvestor.com
Stay ahead with the premier
integrated service on the fastest
growing alternative asset class
New from PEI, Infrastructure Investor is
Infrastructure Investor
the premier destination for market will provide you with
intelligence on the fastest growing intelligence on:
alternative asset class. It covers all the key • News - our journalists
infrastructure sectors and takes a global deliver the news and
comments that matter
perspective on the relevant themes • People – we profile the
shaping the industry. people who are influencing,
changing and developing
infrastructure globally
• Features – in-depth
thought pieces on the most
important developments in
this growing market
• Profiles –we take an in
depth look at institutions
that are helping to define
infrastructure today
• Resources – data and
league tables ranking key
institution types

4 easy ways to order:

London: +44 20 7566 5444 fran.h@peimedia.com
New York: +1 212 645 1919
www.peimedia.com
+44 20 7566 5455

www.infrastructureinvestor.com
www.infrastructureinvestor.com
PEI Media London PEI Media New York PEI Media Singapore
Sycamore House 3 East 28th Street 11 Stamford Road
Sycamore Street 7th Floor #02-07 Capitol Building
London New York Singapore 178884
EC1Y 0SG NY 10016 T: +65 6334 4346
T: +44 20 7566 5444 T: +1 212 645 1919 F: +65 6334 4391
F: +44 20 7566 5455 F: +1 212 633 2904