Private Eye: Washington reports single-digit net IRRs on big Alinda bet

Alinda Capital Partners made a splash in the middle of the past decade, charging out of the gates to raise a $3 billion value-added infrastructure fund. It was one of the largest debut funds.

Many investors had been unfamiliar with a big aspect of the strategy the New York shop intended to pursue. Alinda planned to take stakes in U.S. toll roads, toll bridges, airports and other infrastructure assets more typically owned and run by municipalities.

By the time the debut fund closed at $3 billion in 2007, big pension funds in California, Illinois and Washington were convinced, drawn by the promise of healthy returns uncorrelated with other asset classes. Many of the properties Alinda Capital targeted for investment in North America and Europe have “monopoly characteristics,” Chairman and Managing Partner Chris Beale said in a 2008 write-up in a special supplement to Buyouts magazine

For its innovative strategy and success raising that debut fund, Alinda won a “New Firm of the Year” award in early 2008 from Buyouts.

The return expectations of these early Alinda Capital backers isn’t clear. But a recent survey by placement agent Probitas Partners found two-thirds of institutional investors target net IRRs on value-added infrastructure funds of 12.5 percent to 15 percent. None target less than 10 percent.

Alinda’s track record over its first five years was strong enough to enable it to close a second, $4 billion fund in early 2010. But nine years down the road, backer Washington State Investment Board has failed to generated double-digit net IRRs on the first three Alinda funds.

The $128 billion pension system, which committed to all three funds, including $100 million to the third fund in mid-2016, puts the respective net IRRs of Funds I, II and III at 6.31 percent, 4.89 percent and 9.42 percent as of Sept. 30. It classifies their vintages as 2007, 2009 and 2016.

Washington SIB executives declined further comment for this column, but by 2016 the state evidently liked what it was seeing from the first two pools. Along with its $100 million commitment to Fund III, the state awarded $300 million to Alinda for a separate managed account, bringing its total commitments to the firm to $950 million.

Results from California Public Employees Retirement System are consistent with those of Washington SIB. Over the five years through June 30, 2018, Alinda Infrastructure Fund I LP generated a 10.5 percent annual net return for the state pension, its August CIO performance report shows. The second fund generated a more modest 4.2 percent annual net return for CalPERS over the same period. Executives at CalPERS declined comment for this column.

What accounts for the single-digit net returns generated for Washington SIB and CalPERS isn’t clear. In an emailed response to an interview request, Beale said:

  • “We believe that Alinda Fund I was the best performing infrastructure fund for its vintage of 2006. It invested before the financial crisis and weathered the crisis well.
  • “Fund II has produced a 1.34x multiple to date, which is good.
  • “Fund III has produced an IRR of 13 percent to date and has one of the highest cash yields in the infrastructure space.”

Beale did not respond to additional questions about those results. Our last major profile of Alinda, from June 2010, said the firm was managing to stay relatively busy “even as the expected avalanche of deals in U.S. transportation, utilities, and other infrastructure assets never materialized.” Part of the problem: politicians and labor groups opposing the privatization of toll roads and other government-run assets.

For any firm, a slower-than-expected investment pace can widen the gap between gross and net IRRs, although it is not clear if that has been an issue for Alinda. The 2010 story reported that the firm was finding opportunities abroad, including in Canada, the U.K. and the Netherlands. The firm’s website lists 12 active investments, grouped in such categories as transport, utilities, telecom and midstream infrastructure, along with some 20 realized or partly realized investments.

Documents do suggest that the firm’s pace of blind-pool fundraising, if not deal-making, has slowed. IPE Real Assets reported in mid-2016 that Alinda Capital was seeking $5 billion for Fund III. But as of April 2018, nearly two years later, the firm reported having raised $571.7 million through Fund III and a parallel fund, according to Form Ds filed with the SEC. Those totals exclude separate accounts, such as the $300 million program with Washington. If large enough, those accounts may have enabled Alinda Capital to maintain its desired deal pace.

Other filings suggest the firm attempted to raise a global core infrastructure fund during the 2012-2013 period. While it secured at least $340 million in commitments, according to filings, the fund name does not appear alongside other active funds on Alinda’s Form ADV. I was unable to determine what happened to the fund. Overall, the Form ADV brochure, dated March 2019, puts the firm’s discretionary assets under management at $5.1 billion and its non-discretionary AUM at $297 million.

As for the firm’s plans for a fourth fund, figures from Washington SIB show that $62 million of its $100 million commitment to Fund III had been drawn down as of Sept. 30. That suggests the third fund is nearly two-thirds exhausted.

If so, Alinda will soon get another chance to test investor appetite for its brand of infrastructure investing.

Action Item: Download the Probitas infrastructure survey here: