Just before the 2008 financial crisis, the large London based multi family office Stonehage Fleming decided to rethink where it deployed some of the large pool of capital it was managing for several rich families.
The group, which wanted to diversify its portfolio away from private equity and real estate, in the end decided to reroute a portion of capital into infrastructure. It did so partly because, unlike private equity, infrastructure offered income in the form of dividends during the course of the investment. Over the following months, it went on to invest more than £100 million ($153 million) in the sector, largely in listed and unlisted infrastructure funds.
Stonehage Fleming, whose roots lie in the sprawling business empire created by its Victorian ancestor Robert Fleming, a major investor in the early American railways, has since exited almost all its infrastructure fund commitments. But now it wants back in. Its head of private funds, Richard Clarke Jervoise, said that over the next two years Stonehage Fleming plans to invest sizeable sums of capital into infrastructure equity funds.
Stonehage Fleming is not the only money manager to the super rich capital to have targeted infrastructure.
For some time a sizeable number of family offices, which manage the wealth of a single high net worth family, as well as multi family offices like Stonehage Fleming have been building up commitments to the sector. But, according to InfraNews and InfraDeals research, such offices are just a fraction of the significant source of capital from wealthy that has flowed into the sector. Infrastructure funds have also managed to tap the wealth of the world’s rich by forging joint ventures with private banks and other wealth management institutions. These funds and also private banks themselves have pooled hundreds of millions of pounds from the ultra wealthy and invested it into feeder vehicles, which in turn have invested in infrastructure funds and infrastructure funds of funds. Other wealth managers such as Mercer and HPC Capital have also invested significant amounts of capital into the sector.
All this may come as a surprise to some in the infrastructure sector. Much of the investing by high net worth individuals via money managers takes place under the radar. Given the private nature of wealth management, such secrecy is not unexpected. The mainstream view has been that capital flowing into the infrastructure sector has come either from listed funds – or from institutional investors such as pension funds, insurers and sovereign wealth funds. Such investors, after all, are attracted to the safe, reliable returns typically offered by infrastructure.
High net worth individuals, in contrast, tend to go for either the racier, relatively quick returns promised by private equity and real estate, or the safe havens of fixed income. All this is significant for one key reason. Increasingly, fund managers are finding it more challenging to raise capital from institutional investors, largely as pension funds and insurers generally are preferring to invest direct into the sector. The need, therefore, for infrastructure fund managers to tap alternative sources of capital, such as the bank accounts of high net worth individuals, is more acute than ever.
Family offices eye up infrastructure
What is clear is that the scale of investment by high net worth individuals into the sector is significant – possibly far more than many previously considered to be the case. Certainly, there is anecdotal evidence supporting this view, not least from fundraising specialists.
“We talk to circa 250 family offices and 100 private banks across Europe and North America, most of which we have approached within the last 12-24 months about infrastructure,” one placement agent told InfraNews. Another fundraising specialist said it is “relatively common” for wealthy individuals to provide commitments to feeder vehicles – special purpose companies set up to pool capital from retail investors. A single feeder vehicle may receive upwards of 25 or 30 commitments from wealthy individuals, each providing about £1 million apiece. A look at the number – and type – of family and multi family offices investing into the sector will also demonstrate the importance of private wealth to the infrastructure sector.
Besides Stonehage Fleming, another sizeable multi family investor – and one which has never linked in the past to infrastructure – is Harald Quandt Holding. This German based business has its roots in a business empire created by Guenther Quandt, a businessman who famously produced military equipment for the Third Reich. A substantial portion of Guenther Quandt’s wealth was inherited by his son, Harald, who passed away several decades ago. His wealth is now distributed among his four daughters – and is managed by Harald Quandt Holding.
The Quandt family office has expanded significantly over recent years. Today it has four financial service companies managing the money of Harald Quandt’s ancestors as well as third party money. InfraDeals’ records show that it also has $11 million of commitments to InfraRed Infrastructure Fund III, which has invested in the likes of the A63 PPP in France and the Singapore Sports Hub PPP.
InfraNews understands that family office Aeris Capital is an investor in infrastructure – and also has commitments in InfraRed Infrastructure Fund III. Aeris itself, which does not have its own website, did not answer requests for comment. Capital linked to the ancestors of Kristian Gerhard Jebsen, the Norwegian ship owner who died in 2004, has also found its way into infrastructure. Via Kristian Gerhard Jebsen Skipsrederi, a major
international shipowning company controlled by Kristian Gerhard Jebsen’s offspring, $8.5 million of the family’s wealth has also been invested into InfraRed Capital’s third infrastructure fund, according to InfraDeals research.
One of the largest family offices believed to have money invested capital into infrastructure is one called Bregal Investments – the investing arm linked to the German-Dutch billionaire Brenninkmeijer family, the founders of the C&A store chain. Bregal Investments, which is based out of offices in Jersey, on New York’s Park Avenue and a third floor office block on London’s Fulham Road, predominantly invests in private equity. According to its own website, it has €7 billion of committed or invested capital across the energy sector as well as special situation and buyout fund. But it also has committed to Englefield Renewable Infrastructure Fund, a fund established by Englefield Capital, a UK private equity house.
Another prominent investor in the infrastructure sector is the family office of Marcard Stein & Co – which is owned by MM Warburg, a German private bank controlled by the prominent Warburg family, sources said.
Feeder funds and private banking
There is also evidence that feeder funds – specialist vehicles used to pool smallish amounts of capital from multiple sources – are an important source of LP capital in infrastructure. Some of the evidence of this, again, is anecdotal. One fund manager said that it is “not at all rare” to find the managers of a fund or feeder vehicle knocking on his door looking to deploy capital into his own infrastructure fund.
“For instance,” the manager said, “I have been contacted recently by someone who is aggregating high net worth commitments and seeking to invest them via a feeder vehicle into infrastructure. This person is in the process of raising capital right now.” But there is also evidence that some of the more developed – and, arguably, innovative – infrastructure investors have raised sizeable quantities of capital from the ultra wealthy via feeder funds. And some of this fundraising is recent.
Last December, for example, Industry Fund Services launched a vehicle called the IFS Infrastructure Fund. The vehicle will commingle funds and invest in infrastructure via the IFM Australian Infrastructure Fund, a fund for institutional investors. In the more distant past Macquarie has also used feeder funds. Its Macquarie Infrastructure Gateway Investment Fund, sought to raise capital from “sophisticated investors”, including high net worth individuals, and ultimately invested some capital in Macquarie European Infrastructure Fund II and the remainder into the Delaware-registered Macquarie Infrastructure Partners. Along with asset manager Mercer, Macquarie also created two trust vehicles – Macquarie Mercer Infrastructure Trust I and II – to invest in the Elizabeth River Tunnels PPP project in Virginia.
Mercer itself is also a significant investor via feeder funds in infrastructure. Its vehicle Mercer Private Investment Partners III has invested $6.5 million in Antin Infrastructrue Partners II & $1.8 million in Glenmont Clean Energy Fund Europe II. Its Mercer Global Unlisted Infrastructure Fund has ploughed LP capital into the Macquarie Specialised Asset Management Limited, which in turn has invested in Macquarie Atlas Roads and Sydney Airports as well as in other noninfrastructure sectors.
The fund has invested capital in infrastructure vehicles associated with KKR, IFM and First State. Private wealth capital raised by HPC Capital, a Hamburg based funds specialist, has also entered infrastructure funds managed by Deutsche Asset & Wealth Management, the Carlyle Group and Eiser.
A further illustration of the flood of ultra wealthy wealth entering infrastructure is by a cursory examination of private bank investment in the sector. Institutions such as Credit Suisse, JP Morgan and Goldman Sachs have invested hundreds of millions as seed capital into their infrastructure funds. In addition, InfraDeals’ records show that a number of private banks have invested into infrastructure funds. Both Pictet Private Equity Investors and HSBC Trinkaus Pool have LP commitments in the InfraRed Environmental Infrastructure Fund. Macquarie’s infrastructure division has also tapped significant quantities of capital from private banks. It currently manages about €1 billion of capital provided by clients of Lombard Odier Darier Hentsch, a Swiss private bank.
Its investments so far have included a 70% stake in Pisto, the oil storage company in France, and it owns a stake in Tanquid, an operator of oil
storage sites in Germany. In addition, Macquarie Prism, a vehicle for Macquarie’s high net worth customers, has stakes in the specialist emergency services communications group Arqiva and motorway service station operator Moto, and in the past owned a stake in utility Wales & West. Macquarie Prism also previously sold a 2.57% stake in Thames Water to a vehicle called Equity Partners Infrastructure Company (EPIC). EPIC was a joint venture between Macquarie and a New Zealand high net worth individual, George Kerr.
Why are families investing in infrastructure?
There is no shortage of reasons for why high net worth individuals have invested such large amounts of capital to the sector in the past. Firstly, there is the reason ascribed by Stonehage Fleming: that infrastructure, unlike private equity, pays dividends to its shareholders during the course of an investment.
Second, over recent years, family offices have grown through mergers and acquisitions, many forming multi family offices in the process. These larger entities, each with their complement of professional fund managers on board, are better equipped at
making investment decisions – as well as navigating the maze of regulation and taxes governing cross-border and large-scale investments.
“It takes quite a sophisticated investor to decide to allocate capital between different sectors,” one infrastructure fund manager said. Thirdly, over recent years, the infrastructure finance sector has become recognised as an important asset class – and therefore more attractive to investors seeking a relatively safe haven for their capital.
“Infrastructure has become more established as an asset class,” one fund manager said. “It is no longer just an interesting experiment, rather it is becoming a more standard building block of a portfolio.” One fund manager echoed this view, saying its investors now view infrastructure as “more forward thinking and cutting edge” than it had been deemed to be in the past.
The current economic climate is also providing further incentive for high net worth individuals to invest – and for their own capital to be tapped by fund managers. One reason often cited is that such investors are increasingly dissatisfied with investing in fixed income in the current low interest rate environment and are looking for new places to deploy their capital.
"Infrastructure provides opportunities for diversification in a low interest rate environment,” one infrastructure fund manager said. The more private equity nature of current infrastructure investing is also helping to attract capital from the ultra wealthy.
Evidence of such a shift lies in recent private equity style deals such as 3i Infrastructure and AMP Capital’s acquisition of Esvagt, an emergency vessels business, and Antin’s purchase of Amedes Group, a medical diagnostics business. Some family offices may regard such deals as little different to a transaction by a private equity fund. The private equity style returns of 15% from such infrastructure deals are also attractive to family offices.
“Family offices are an attractive source of capital for more niche, higher-returning strategies generally on the cusp of the division between PE and infrastructure,” one fundraising adviser said. Also, an infrastructure finance specialist said between 20% and 30% of family offices “have a private equity approach to infrastructure, only considering strategies that can deliver at least a 15%+ IRR over a shorter-term hold”.
In addition, one director at a European family office said he was attracted to the private equity style “value added” strategy of some infrastructure funds. Such strategies, he said, involve fund managers acquiring assets relatively cheaply, enhancing them through capital investment and operational savings, and then selling them for a significant premium. Infrastructure managers have themselves used this strategy. Another attractive quality of infrastructure for some family offices is the proliferation of debt funds in the sector over recent months. These funds offer a similar risk profile and level of yield to infrastructure equity funds – but at the same time have shorter maturities, one family office source said.
But infrastructure will not be for every member of the ultra wealthy class. Funnelling millions of pounds into the sector can be extremely expensive. Doing so involves at least two layers of fees – the first to the private bank and then to the infrastructure fund manager. This is on top of the third layer which goes to the wealthy individual’s family office.
Indeed, a number of the feeder vehicles set up by infrastructure funds have commanded seemingly high fees. Documents show that investors in Macquarie Infrastructure Gateway Investment Fund were charged a performance fee of 20% if IRRs exceeded 8%, plus management fees of 1.5% per annum of the total commitment amount, a 2% “establishment fee” and administration fees of 0.5%. In contrast, Industry Fund Services’ more recently launched IFS Infrastructure Fund only charged a management fee of 0.95% of the net asset value of the fund.
Transactions associated with Macquarie Prism also illustrate the potentially large fees that the rich may have to pay if they become entangled in infrastructure investing. Documents outlining the sale of Macquarie Prism’s stake in Thames Water clearly demonstrate the various vehicles, each charging fees, involved in divesting what amounted to a small stake in a single asset. They show that Macquarie Prism itself charged fees as the trustee of the stake being sold.
The manager of another Macquarie vehicle, Macquarie Water, which was described as the beneficiary of the stake, also received fees. In addition, a third Macquarie vehicle, Macquarie Investment Management (UK) Limited (MIMUK), provided investor services and received fees based on the IRRs of Thames Water. Macquarie received even higher fees in return for establishing and raising capital for Equity Partners Infrastructure Company (EPIC) the company that acquired Macquarie Prism’s Thames Water stake.
Documents show EPIC’s lead manager, Macquarie Equities New Zealand Limited, received upfront fees of NZD7.3 million ($4.63 million). Macquarie Infrastructure Pty Limited also received from EPIC’s wealthy shareholders 2% of total capital raised by EPIC. EPIC also paid fees to MIMUK based on Thames Water’s IRRs.
Pitfalls to infrastructure investing
There are other challenges to the rich who want to invest in infrastructure. Regulations governing investment in infrastructure have toughened recently, it is understood.
“The regulatory environment that previously was quite standardised has now become more stringent and more commercial,” said one investor. Indeed, one investor said the regulations governing feeder vehicles are more stagnant in the UK than in Germany and Switzerland.
Some family offices have also been burnt in the past by investing in infrastructure. A manager at one multi family office said he has “liquidated” a number of his office’s LP commitments to infrastructure. Another said he had invested capital in an infrastructure fund hoping he would invest in safe regulated infrastructure. Instead, the fund invested into “assets with a lot of merchant risk”. He added that “funds have suffered from currency volatility”.
There are other more fundamental reasons why some high net worth individuals may not invest capital into the sector. Typically, infrastructure investing, unlike private equity, involves keeping investments for the long term. In contrast, family offices generally prefer more liquid investments. For this reason, infrastructure debt funds, which have shorter lifespans than equity infrastructure funds, are attractive to some family offices. Not all infrastructure fund managers are sympathetic to this view. They claim that, in fact, family offices can buy and sell their commitments in infrastructure funds at will, and therefore do not have to keep their investments for the entire lifespan of a fund.
Another challenge cited is that private bank capital tends to be raised and allocated in one go. As a result, such capital is sitting in escrow accounts rather than providing returns to its high net worth LPs. In contrast, institutional investor capital is typically drip fed into a fund. In spite of these negatives, infrastructure is clearly on the radar of many managers of high net worth individuals’ capital. Governments are also said to be tapping the wealth of family offices as well as sovereign wealth funds. And rich individuals continue to target infrastructure – as well as renewables, another rich source of deals for the world’s wealthy.
This article was originally published in InfraNews, and is reproduced with permission.