Guest Blog: Infrastructure – Direct Deals, Club Deals, and New Technology Platform!

Ryan Orr

Recently the State of Queensland sold the Port of Brisbane to a consortium comprising QIC, IFM, GIP, and ADIA for around A$2bn. The port sale is part of Queensland’s ongoing infrastructure privatisation program which includes a listing of Queensland Rail’s freight business, and the sale of a motorway network in Brisbane, and a coal port in North Queensland.

Why are large pension and sovereign wealth funds increasingly investing on a direct basis?   The answer is multi-faceted.  They desire to better align investment decisions with long-term objectives.  They are learning that they have a comparative advantage, in terms of time horizon and check-writing capability.  They want to control assets that they intend to hold for the long-term.  And they are frustrated with carry-based incentive structures that incentivize risky asset selection and excessive leverage, and flat management fees that do not adjust with actual management expenses.

Going direct is not viewed as an appropriate strategy for the more opportunistic plays – such as greenfield development – but it is viewed as a superior model for “core” infrastructure, which is operating, lower-risk, stable, and governed by stable regulatory regimes.

A handful of the pioneering pensions and sovereign wealth funds have already developed internal capabilities to source, structure, and asset-manage large multi-billion dollar “core” infrastructure assets.   Another group of 10 to 20 institutions is in the wings, already sourcing co-investments, and could eventually develop the capabilities to structure direct deals and lead consortia themselves.

Does this trend spell the end of third-party managed funds?  Definitely not.  Smaller institutions will always need the help of third-party fund managers.  And larger institutions who were early to the direct foray are quickly realizing the value of third-party fund managers too.  Bidding on highly politicized privatizations, investing in far-flung emerging markets, and entering sectors where specialist skills are required all present such scenarios.  Third-party fund managers also provide a valuable source of large co-investment opportunities.

As a growing number of funds in-source their infrastructure investment practices, there is a growing tendency among “direct investors” to work together in clubs. The rationale for “clubbing” includes:  splitting up large deals without exceeding capital constraints; sharing talent, due diligence and research costs within a bigger group;  negotiating better terms by reducing competition;  and ensuring local knowledge when investing in international markets.

Despite the trend in this direction, club deals are actually quite difficult to organize and coordinate. The big challenge for the “leaders” – both pensions and third-party fund managers — who have done a number of these deals lies in finding “reliable partners” who can be trusted to share the burden of due diligence activities and expenses, and who are sure to ante up for their share of the investment on the day of financial closing. Moreover, there is great variation across institutions in terms of availability of resources, staffing, sophistication, risk-return profiles, strategic priorities, and decision-making processes.   These factors constrain successful club deals.

In general, club deals have worked the best when institutions bring complementary resources, skills, experience, knowledge, perspectives, relationships, locational advantages, and other kinds of “comparative advantages” to the table. This ensures the investors feel as though they are receiving a “fair exchange” for their inputs and that there is a “real economic rationale” for working together.

Despite the growing trend of direct and club investing, institutions lack a formal mechanism to seek out partners and to explore potential alignment of investment objectives.  We are thus confronted once again with the need for intermediation. As we know, financial intermediaries are crucial for the development of new markets and bringing buyers and sellers together.

‘Market-making’ firms come in various types, and one of the most basic types are the exchanges and bulletin board systems where buyers and sellers can find one another.   Although there is not currently such a platform serving the infrastructure space, an up-and-coming technology platform may soon fill the void.   Several of my former students are behind this project, along with a team of world-renowned industry veterans and Silicon Valley entrepreneurs.  Known as Zanbato, more than 50 market-participants are signed up for the service already, which is now in a limited invitation-only Beta test period.  When the time is right, we will post more information on this blog — so do stay tuned!

Dr. Ryan Orr is Executive Director of the CRGP at Stanford University.

1 Response to “Guest Blog: Infrastructure – Direct Deals, Club Deals, and New Technology Platform!”


  1. 1 Sven Behrendt February 22, 2011 at 6:06 am

    Great entry, Ryan! Could you share some thoughts, if at all, about the potential for SWF investments into low carbon development which arguably requires a lot of infrastructure development? There are a number of organisations out there that would be very interested in learning how to make the business case for that to SWFs.


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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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