On Infrastructure: Do It Directly…If You Can

Ashby Monk

I saw yesterday that the FT had an article on Global Vía Infrastructuras (GVI), which is a struggling infrastructure investor that needs to raise some capital:

“The infrastructure subsidiary of FCC, the Spanish construction and services group, has begun talks with specialist investors about the sale of a stake in the company… it is understood the Madrid-based group, which manages €3bn ($4.2bn) worth of toll roads, ports, airports, railways and hospitals mainly in Europe and the Americas, is looking to sell a large minority stake to a pension fund, insurance group, sovereign wealth fund or investment bank… Juan Béjar, the chief executive, said the company was looking to sell about €500m worth of equity, between 20 and 40 per cent of the company.”

The question I have is why an SWF would invest in a private asset manager that invests in infrastructure rather than just investing in the infrastructure directly?

The obvious answer is that the SWF doesn’t have the necessary governance or competency to do these deals. Therefore, they have to outsource it to these private sector guys. Fair enough; I totally get that. But (!) a SWF investing in a private asset manager that, in turn, invests in infrastructure just seems off to me. Feel free to disabuse me of this position, but won’t the SWF be giving up its main competitive advantages by doing this (i.e. scale and time horizon)?

Again, my view is that the scale and time horizon of SWFs makes them (in theory) world beaters in this specific asset class. Who can bring this amount of money over this time horizon to a single infrastructure project? I’m pretty sure the answer to that question is ‘nobody’. I don’t think…and I could be wrong here…that the private sector asset managers can compete on the same level; the private funds are too small and the duration of the infrastructure assets too long (and the demands of the LPs too myopic).

So, what to do? Well, perhaps more SWFs should skip the circuitous route into infrastructure (via private managers) and, instead, look to develop the skills and governance needed to do this directly. Of all the asset classes out there, I think it’s worth it for SWFs to consider ‘in-sourcing’ infrastructure. Now, I’ll be the first and the last to say this, it has to be done right, as there are plenty of opportunities to screw up…and big…which means the fund has to be extremely proactive about design, governance and skills.

This last point actually gives me an opportunity to plug some of my new colleagues at Stanford University. Wait, what? Stanford? Yes, I guess I should first mention that I’ve accepted a position at Stanford University as a Visiting Scholar in their Collaboratory for Research on Global Projects. Not to worry, I’m still on the faculty at Oxford and all the Oxford SWF Project stuff will continue on as if nothing has changed. However, I will be doing a bit of work (i.e., I’ll be having deep thoughts with other academics) at Stanford about how large public investors might set up their internal governance systems to facilitate direct investing in infrastructure. This type of big picture thinking with real world applications is pretty much exactly what the CRGP is all about. Here’s a blurb about my new home-away-from-home:

“The aim of CRGP’s research program is to enhance understanding of legal, social, political, financial, and institutional processes that interact in complex ways to affect global project outcomes.”

Cool, right!?!? Yes, I’m a big nerd, but these guys are really doing some interesting stuff. For example, they are hosting a one-day conference in December that drills down into project level due-diligence and analysis that will bring academics together with large, public investors. I’ll be attending purely as a spectator.

Anyway, all this is to say the following: I feel as though SWFs have a certain strategic advantage in infrastructure investing, but, in order to leverage this, they really need to be investing directly. In turn, this requires upgrading the organization for a complex and risky endeavor. In my view, it’ll be worth it over the long-term…

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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