Infrastructure Funds: Creative Use of Corporate Structure and Law - But in Whose Interests?

Abstract

Infrastructure as an asset class has commanded increasing attention from investors and the financial press over the past two years. Major asset sales in the UK - most notably of ports and water utilities such as Thames Water - and ongoing attention on road infrastructure in the United States and Europe, has been met with increased competition for assets, not from 'trade buyers' (such as utility companies) but from investment banks and asset managers. The asset manager model for infrastructure, where a sponsoring manager - usually but not always an investment bank - establishes a separate publicly traded entity to own infrastructure assets while contracting out management functions to the sponsor, was pioneered by Australia's Macquarie Group Limited (known until recently as Macquarie Bank). Even as the managed infrastructure model has grown in popularity, at least among potential and actual asset managers, there are some signs of investor unease with the existing model. At the basis of these concerns is the unique governance structure that has emerged among publicly traded infrastructure vehicles. This paper initially outlines the main features of infrastructure assets. It then explains the importance of distinguishing between infrastructure assets and infrastructure funds. The predictable, and steadily growing, cash flow associated with infrastructure assets is commonly highlighted as a basis for providing an attractive, and steady, yield. However, the yield delivered by several infrastructure funds is sourced from operating cash flows of the fund's assets and from capital. The paper then summarizes the key features of the infrastructure fund model, pioneered by Macquarie. It then highlights a range of investment-related concerns with the infrastructure model: a series of issues related to the sustainability of the model; a danger of overpaying for assets; fee structures that provide an incentive to increase a fund's size without sufficient regard to returns; and accounting practices that have the capacity to provide an overly robust picture of a fund's profitability. The paper then describes a series of governance concerns with the infrastructure model. For instance, the existence of 'special shares' in some funds which entitle the external manager to appoint a majority of the fund's directors. The paper concludes with a series of reform proposals.