Article

Infrastructure Funds Primer

By Zachary K. Barnett and Nadav Klugman1

Infrastructure funds are private equity vehicles funds—$200 million to IFM Global
that invest in a wide range of assets—including Infrastructure Fund and $100 million to J.P.
assets that could be described as transportation, Morgan Infrastructure Investments Fund—and
energy and utility, communications, and “social” has a long-term infrastructure target allocation of
infrastructure, and investments that may be 12.5% within the real assets portfolio, or 2.125%
specific to a particular asset or in a company that of total plan assets.4 The Kentucky Teachers’
develops such assets or is otherwise involved in Retirement System committed $100 million to
their operation. Like other private equity funds, IFM’s Global Infrastructure Fund,5 and the
they have limited lifespans, typically five to ten Missouri Education Pension Trust committed $75
years. They often attract capital commitments million to Alterna Core Capital Assets Fund II.6
from investors with appetites for relatively stable, The $420 million Chicago Park Employees’
long-term cash flows, many of which have Pension Fund entered the infrastructure space by
liabilities stretching over several decades. General committing $10 million each to infrastructure
partners of infrastructure funds are often able to funds managed by Ullico Investment Co. and
leverage those commitments during the Industry Funds Management.7 There is, however,
investment period. considerable room for growth among pension
funds. According to a new report from the
In recent years, institutional investors have felt
Organization for Economic Co-Operation and
increased pressure to search for higher returns
Development (OECD), unlisted equity and debt
and diversify from traditional asset categories
infrastructure investments for the 69 survey
such as public equities and fixed income
respondents amounted to only 0.9% of total
instruments. After slumping in 2011, fund-raising
respondent assets.8
by infrastructure funds improved significantly in
2012 and 2013, with capital raised in the first This growth is being driven by renewed demand
three quarters totaling $19 billion.2 Despite an for stable, long-term returns in a lower-yield
increase in the average fundraising lifecycle,3 not environment, and a variety of “infrastructure”
only did capital commitments to infrastructure asset classes are filling that demand. With
funds continue to grow, investors indicated that respect to power production, renewables have
they were looking to expand their infrastructure been popular, and the largest independent power
allocation. producers were able to take operating assets into
the public markets in ways that provide attractive
Pension funds are notably increasing their
exit opportunities. In 2013, Pattern Renewable
exposure. The Alaska Retirement Board
Energy and NRG publicly listed “yieldcos,” which
committed $300 million to two infrastructure
aggregate the cash equity return from utility-scale
power projects that have debt and tax equity reasons, first among them the record number and
financing. Several other renewable energy aggregate target of all funds in market.12 (A
developers are in the process of evaluating if such consequence of the crowded fundraising
a structure would benefit them. environment is the increasing use of placement
agents to assist in the fundraising process, and
In the transportation space, several states moved
with reason—over the past two years,
forward with initiatives to facilitate private
infrastructure funds that have used placement
investment in toll roads and other similar assets,
agents have been more likely to meet or exceed
and successful project completions in recent years
fundraising targets and to reach financial close.13)
leads some to believe that future formations of
Investors indicate that the most attractive
such partnerships are likely. Virginia is moving
managers are those with cohesive and concise
ahead with a series of PPP toll road procurements
plans, a focus on high cash yield and defensive
following the successful completion of its I-495
and predictable investments, a healthy deal
Express Lanes project, which at $2 billion was
pipeline, and, most importantly, strong past
delivered on time and on budget. In November
performance.14 (Globally, the top ten
2013, the New Jersey Turnpike Authority put out
infrastructure fund managers account for 45% of
a request for proposals seeking bids for toll
capital raised by infrastructure funds in the last
collection services, including management of the
ten years, and the largest firm, Macquarie
electronic tolling system and the toll collectors.9
Infrastructure and Real Assets, raised over six
MAT Concessionaire, LLC (MAT) received a 35-
times the amount raised by the tenth largest firm,
year concession agreement, which includes 55
LS Power Group, but that percentage has
months for design and construction, for the Port
dropped in recent years as more firms have
of Miami tunnel project, one of the first to make
entered the asset class.15) Current portfolios of
use of availability payments. Design and
infrastructure fund limited partners demonstrate
construction costs are currently at $663 million.
a preference for regional-focused funds, but there
MAT will be paid $156 million in milestone
is increasing preference for geographic
payments during construction and a $350 million
diversification as well.16
payment upon final acceptance of the construction
works. The majority of MAT’s equity is being Further increasing pressure on fund managers is
provided by a Meridiam infrastructure fund. the trend for large, sophisticated institutional
investors to bypass infrastructure funds entirely
A number of infrastructure funds are also seeking
and make direct investments.17 While the
to satisfy the need for debt as an alternative to
motivations vary—to avoid paying fund
traditional bank and bond financing at the project
management fees and lower carrying costs,
level.10 Of the 1,700+ active investors in the
increase control over asset disposition decisions,
infrastructure asset class tracked by Preqin, as of
deploy additional capital, and avoid the
February 2013, 285 were actively considering
disposition of assets that could continue to
debt investment opportunities. Darby Overseas
generate steady returns—making direct
Investments has raised three debt funds totaling
investments requires significant investments in
$442 million, and Allianz Global Investors is
manpower and the development of a variety of
currently working on a £1 billion UK-focused
skills. In addition to performing upfront
debt fund that will provide debt financing to a
technical, legal, regulatory, and financial
wide range of both economic and social
diligence, such investors need project
infrastructure projects.11
management and asset divestiture expertise.
While investor appetite for the various While only the largest and most sophisticated
infrastructure asset classes continues to grow, so investors are able to execute such a direct
have fundraising challenges for a variety of

2 Mayer Brown | Infrastructure Funds Primer

investment strategy effectively, direct co-investments, and the range of expertise
investments and co-investments are increasingly needed to diligence and manage such a broad
utilized,18 and investors are conditioning fund category of assets. Their recent growth, and the
commitments on the ability to retain control of momentum of that growth, suggests that that the
key investment decisions, including investment industry is able to turn such challenges into
horizons.19 opportunities. We expect that it will continue to
do so, and that the financing structures the
In assessing infrastructure investments, investors
industry utilizes will continue to evolve as well.
and fund managers face a variety of concerns that
are less relevant in other asset classes. In
particular, the stability of the applicable Endnotes
regulatory regime, and the possibility of changes 1 Zac Barnett is a finance partner in Mayer Brown’s Chicago office,
in law that may materially impact investments, is the co-head of the firm's Global Lending practice and is the
are often critically important inquiries. For global head of the firm's Fund Finance practice. Nadav Klugman
investments in emerging markets, the risks of is a partner in the Banking & Finance practice in Mayer Brown’s
adverse action by local governments come to Chicago office.

mind fairly readily, but such actions have major 2 The Preqin Quarterly Update: Infrastructure (Preqin, New
impacts in developed markets as well. The York, N.Y.), Oct. 2013.

renewable sector provides particularly clear 3 Infrastructure Fundraising: Time on the Road, Infrastructure

examples. Spanish solar tariffs were reduced Spotlight (Preqin, New York, N.Y.), Oct. 2013, at 2.

retroactively, Germany’s were cut prospectively, 4 Kevin Olsen, Alaska Retirement Board Earmarks $300 Million
for 2 Infrastructure Funds, Pensions & Investments (Sept. 25,
and elections in Ontario, Canada, were in large
2013, 2:14 PM).
part a referendum on the province’s renewable
5 Infrastructure Investor Research & Analytics: Infrastructure
energy programs. In the United States, key
Investor Half Year Fundraising Review 2013, 1, 7 (Ethan Koh
federal tax incentives have repeatedly been Ke Ling ed., 2013).
renewed and extended only on short-term bases, 6 Rob Kozlowski, Missouri Education Pension Trust Commits to
and there is concern about the deferral of state Infrastructure, Real Estate, Pensions & Investments (Oct. 29,
renewable mandates and the implementation of 2013, 3:17 PM),
reliability and market-efficiency mandates by http://www.pionline.com/article/20131029/ONLINE/1310298
quasi-governmental grid operators. Other 59/missouri-education-pension-trust-commits-to-
infrastructure-real-estate.
infrastructure asset classes present similar
concerns. The privatization of government-
7 Kevin Olsen, Chicago Park Employees’ Pension Fund Takes
First Step Into Infrastructure, Pensions & Investments (July 31,
owned assets generally requires express
2013, 3:04 PM).
legislative or municipal authorization, which can
8 Kevin Olsen, OECD: World’s Largest Pension Funds Slow to
be heavily conditioned, and is often subject to
Take on Infrastructure Investing, Pensions & Investments (Oct.
intense public scrutiny that may lead to 18, 2013 6:43PM),
renegotiation, as occurred last summer with http://www.pionline.com/article/20131018/ONLINE/13101986
respect to the City of Chicago’s parking 4/oecd-worlds-largest-pension-funds-slow-to-take-on-
concession. infrastructure-investing.
9 Mike Frassinelli, Toll Collector Jobs on N.J. Turnpike, Parkway
Infrastructure funds face uncertainties less Likely to be Privatized, NJ.com (Nov. 19, 2013 6:17PM)
relevant to funds than investments in other asset http://www.nj.com/news/index.ssf/2013/11/toll_collector_job
classes—for example, the significant risk of s_on_nj_turnpike_parkway_likely_to_be_privatized.html.
statutory and regulatory change affecting existing 10 BlackRock Infrastructure Debt Team, BlackRock: Bridging the
and target assets, the prevalence of pension and Gap—The Rise of Infra Funds in Privately Financed
sovereign investors that have strong motivations Infrastructure, CFI (Oct. 29, 2013), available at

to bypass the fund structure in favor of direct and

3 Mayer Brown | Infrastructure Funds Primer

 http://cfi.co/europe/2013/10/blackrock-bridging-the-gap-the- Please visit www.mayerbrown.com for comprehensive contact
information for all Mayer Brown offices.
rise-of-infra-funds-in-privately-financed-infrastructure.
Any tax advice expressed above by Mayer Brown LLP was not intended or written to be
11 Paul Bishop, A Recipe for Infrastructure Fundraising Success used, and cannot be used, by any taxpayer to avoid U.S. federal tax penalties. If such
advice was written or used to support the promotion or marketing of the matter addressed
in the Post-Crisis Marketplace—Placement Agents, Preqin Blog above, then each offeree should seek advice from an independent tax advisor.
(Mar. 20, 2012), Mayer Brown comprises legal practices that are separate entities (the “Mayer Brown
Practices”). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe-
https://www.preqin.com/blog/101/4953/infrastructure- Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown
placement-agent. International LLP, a limited liability partnership incorporated in England and Wales
(authorized and regulated by the Solicitors Regulation Authority and registered in England
and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer
12 Q3 2013, The Preqin Quarterly Update: Infrastructure (Preqin,
Brown Mexico, S.C., a sociedad civil formed under the laws of the State of Durango,
New York, N.Y.), Oct. 2013, at 2. Mexico; Mayer Brown JSM, a Hong Kong partnership and its associated legal practices in
Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer
13 Infrastructure Fundraising: Future Prospects, Brown is associated. Mayer Brown Consulting (Singapore) Pte. Ltd and its subsidiary,
which are affiliated with Mayer Brown, provide customs and trade advisory and
INFRASTRUCTURE SPOTLIGHT (Preqin, New York, N.Y.), consultancy services, not legal services.
Nov. 2012, at 2, 4. “Mayer Brown” and the Mayer Brown logo are the trademarks of the Mayer Brown
Practices in their respective jurisdictions.
14 Infrastructure Fundraising: Future Prospects, This publication provides information and comments on legal issues and developments of
interest to our clients and friends. The foregoing is not a comprehensive treatment of the
INFRASTRUCTURE SPOTLIGHT (Preqin, New York, N.Y.), subject matter covered and is not intended to provide legal advice. Readers should seek
Nov. 2012, at 2, 4; Arleen Jacobius, Heydays Past, legal advice before taking any action with respect to the matters discussed herein.
© 2017 The Mayer Brown Practices. All rights reserved.
Infrastructure Firms Feel Heat, Pensions & Investments, Aug. 5,
2013, available at
http://www.pionline.com/article/20130805/PRINT/30805997
9/heydays-past-infrastructure-firms-feel-heat.
15 Press Release, Preqin, The Top 10 Infrastructure Fund
Managers Account for 45% of Capital Raised by Infrastructure
Funds in the Last 10 Years (July 17, 2013).
16 Infrastructure Investor Research & Analytics: Infrastructure
Investor Half Year Fundraising Review 2013, 1, 7 (Ethan Koh
Ke Ling ed., 2013).
17 Tim Burroughs, Infrastructure Funding: A Beast with Two
Heads, Asian Venture Capital J., Sept. 25, 2013, available at
http://www.avcj.com/avcj/analysis/2296692/asian-
infrastructure-a-beast-with-two-heads.
18 Annual Survey of Large Pension Funds and Public Pension
Reserve Funds, 14 (OECD, Oct. 2013).
19 Infrastructure Investor Research & Analytics: Infrastructure
Investor Half Year Fundraising Review 2013, 11 (Ethan Koh Ke
Ling ed., 2013).

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4 Mayer Brown | Infrastructure Funds Primer