With the recent news that Macquarie has successfully closed its latest €4 billion European infrastructure fund with the assistance of two Guernsey firms, Paul Bannier, Director at Icorserv, reflects on certain topical aspects of infrastructure investment – at least as far as it impacts on fund centres such as Guernsey.
Growth in demand
When measured on a global basis, a huge demand exists for infrastructure investment. Statistics published by the United Nations project that the world population will increase by approximately 83 million people per year during the next two decades with much of the growth taking place in Africa and Asia. Aside from the obvious need for food, water, basic healthcare and housing, population growth triggers demand for energy, transport links and modern telecommunications networks to name but a few.
At the other end of the spectrum in developed nations, life expectancy continues to increase with for example, additional demands placed on the healthcare and welfare systems.
Governments in developed countries have generally under – invested in infrastructure projects and even where investment may be regarded as ‘adequate’, many governments are seeking to shift funding from public finances to privately financed ventures or public / private partnerships as government deficits cease to become sustainable.
Several years ago the World Economic Forum estimated that about US$5 trillion of global infrastructure investment will be required per year in the period up to 2030 in order to support global population growth. I suggest that it is unlikely that number will reduce significantly.
Supply side funding
From an investors’ perspective, the current low interest rate environment is set to continue for some time even though signals are building in the US at least, that the next rate move may be upwards. Investors seeking returns are thus being forced to consider opportunities which they may not have regarded as “core” ten years ago but now offer attractive risk adjusted returns.
The level of uncalled capital which has been committed to fund managers – or ‘dry powder’ as it is often known – was recently estimated to exceed £80 billion. The price of infrastructure assets is currently at relatively high levels due in no small part to the volume of money chasing quality opportunities in the infrastructure space, although over time this will be deployed as managers identify new opportunities.
Historically infrastructure has been regarded by many investors simply as a subset of their private equity, real assets or debt allocations. Increasingly however in recent years, infrastructure has been seen as a distinct asset class in its own right, with the additional benefit that infrastructure investments – at least in their unlisted form – remain relatively uncorrelated to other asset classes.
What does this mean for Guernsey?
Although some limited partners /investors are considering moving from traditional closed-ended fund structures towards co-investment and direct investment vehicles, many lack the internal resources and expertise to actively manage and administer direct investments. This in itself presents continuing opportunities for investment managers and administrators who can provide relevant expertise and systems.
Investors new to infrastructure may well in my view continue to invest in funds and fund-like structures, taking comfort from the fact that these are tried and tested vehicles. Even in cases where new investors opt to route their allocations through co-investment structures, service providers in Guernsey are well placed to meet demand as such vehicles are often already supported as part of the broader service provided to fund promoters.
For those providers servicing fund structures, it will be interesting to see whether new funds are created for longer fixed term periods as sponsors attempt to attract investment from pension funds given the growing appetite of pension funds towards longer term investments as part of their asset / liability matching strategies.
The uncertainty surrounding the UK’s position as a result of Brexit, both in terms of inward and outward investment, as well as distribution rights for investment products is not going to end any time soon. As one panellist at SuperReturn Infrastructure in London in September put it, in the ideal world the UK government would push out the triggering of Article 50 for the maximum two years with a view to getting the greatest number of trade deals over the line as possible. However, whether Prime Minister Theresa May and her cabinet can withstand the pressure from Eurosceptics to press ahead remains to be seen.
Similarly, whether new infrastructure managers choose to set up in London is another question which only time will answer. Clearly there is an element of risk in doing so which could be avoided or mitigated by establishing operations in other European financial centres including Dublin or Amsterdam – which for managers targeting primarily European investors, could prove attractive.
However, for others wishing to build a global investor base and those looking for a single stable domicile from which to target both EU and non EU investors, an alternative solution would be to establish their fund or operations in Guernsey. In 2013 the Island moved quickly to put in place a dual regime whereby managers can select to opt into an AIFM Directive - compatible regime and thus gain access to EU markets (through National Private Placement or in due course a full passport when it is implemented for third countries) or the pre-existing fund regime for promoters seeking non EU investors.
Without doubt, demand for infrastructure investment and financing on a global basis is set to continue and indeed grow over the medium to long term. Investments which can provide stable returns and the potential for significant capital growth are likely to prove attractive to investors – particularly those prepared to take a long term view –although we should expect those investors to become increasingly diligent when selecting who to manage and administer such assets.
The attractiveness of Guernsey as a domicile for investment structures of this nature is generally well understood. Combine this with a broad choice of professional service providers with the expertise, systems and other resources to advise and administer such structures and the prospect for future growth in this area looks bright.