Categorizing Infrastructure: Private Equity, Real Estate, Neither…

The rise of infrastructure investing could probably be covered by the general “convergence” blanket. JPMorgan Asset Management, for instance, installed its infrastructure team into its real estate arm, while AIG considers infrastructure an extension of private equity. Still others see the sector as its own asset class.

“It’s difficult to categorize,” Teachers’ Private Capital Senior Vice President James Leech says. “It’s around the fringes of both.”

Typically, how a group categorizes its infrastructure team will depend on the approach. “On one hand you have the yield driven investor, who will take a buy-and-hold strategy and just hold the assets,” AIG Highstar Capital Managing Director Jim Timmins says, describing the yield-driven and real estate-leaning GPs.

“Then you have the private equity type of investor that takes a strategic view of the businesses and seeks to improve the overall enterprise value through operational and technical improvements and operating synergies. Ultimately the strategy for that investor is to sell the assets for a higher valuation than they acquired them for.”

The differences are at the same time subtle and significant. The private equity play is considered a riskier take on infrastructure. Priced into the investments are the assumptions that “business” will improve, and that an exit market will be waiting at the end of the investment to take the assets off of the sponsors’ hands.

The real estate approach, meanwhile, is much more passive, with potential for upside in turn more limited, at least when considering the near term.

The real estate leaning groups might typically aim for a yield in the ballpark of 12% over a 15 or 20 year time horizon, while the strategic investor sets a goal commensurate with traditional private equity investments, or slightly below those levels depending on the particular deal.

Leech notes that one problem that could arise is when groups start misappropriating the “infrastructure” tag.

“One of the fears I have is that there will be some naïve investors running in and all of a sudden calling a specific asset infrastructure just so they can pay a higher price,”
he says.