The impact of infrastructure funds entering into the market has recently been dramatic. Macquarie has of course clinched Thames Water for £8bn and is now looking at Techem, in what could be the first German hostile public to private deal for circa €1.1bn. At the same time Allianz Infrastructure Holdings, a unit of the giant German insurer Allianz, has just trumped Henderson’s offer for UK building contractor John Laing in what could be a £957m deal.
With a glut of these seemingly attractive deals coming to the market, it is not surprising that cash rich private equity houses with traditional private equity funds desperate to deploy capital are increasingly seen entering auctions for, or circling, these assets.
But the advent of traditional private equity entering into these deals will surely throw up a number of questions. The most obvious of course is the very different lower returns that these long term, low risk stable investments provide – not the racy multiples some investors have come to expect from their private equity investments.
Also, more to the point, how will institutional investors, who are trying to diversify their portfolios by investing in both infrastructure and traditional private equity, feel when their different investment funds are constantly competing for the same deals.
Some might argue that with returns from mainstream private equity likely to fall due to increased competition for assets, returns might begin to converge anyway. Also with private equity firms beginning to set up separate infrastructure funds the likelihood of traditional funds competing against infrastructure funds will become less likely.
In the US for example Carlyle is looking to raise US$1bn for its own infrastructure fund, while other houses active in infrastructure include 3i, Barclays Private Equity and Terra Forma.
But this latter development surely comes with a raft of problems of its own. From the investors perspective what was once a strong traditional private equity house has for all intents and purposes become an alternative asset firm. Will this put off long term investors looking for high growth quick turn around traditional equity investments? Will they now see these alternative investment houses as a more diluted version of their former selves – despite still having a traditional fund.
Also the recent furore surrounding the Department of Justice’s (DOJ) investigation into private equity practices in the US, which has been followed by the publication by the Financial Services Authority (FSA) in the UK into private equity practices in the UK, it might be even less of a good idea with issues of Chinese walls and a conflict of interest between funds becoming even more pertinent.
And not to forget the role of fund managers, a problem which has already been highlighted by tentative moves by private equity professionals into the hedge fund arena. The skill set needed for an infrastructure fund is very different from than that needed to run the portfolio companies of a traditional fund. It will be interesting to see how this plays out. See infrastructure news p6 and infrastructure feature p10.