Alternative Investments Portfolio Management Infrastructure

Infrastructure: categories Private investments in infrastructure projects or contracts Risk varies by categories Social Regulated Transportation Contracted Hospitals Electricity Toll roads Communication towers Senior homes Gas Tunnels Power generation Schools Water Bridges District energy Courthouses Airports Prisons Rail Links 9/21/2018

ways to invest Can be done through direct or indirect investments Big pension plans such as CPPIB, Teachers’ and OMERS have direct investments Teachers’ and OMERS: UK’s High Speed One Smaller pension plans do it through a limited partnership (LP) with an infrastructure fund manager (commingled funds) Some infrastructure funds are publicly listed e.g., Brookfield Infrastructure Partner L.P. (TSX listed) ETFs – index of infrastructure management companies that are publicly traded iShares Global Infrastructure ETF (TSX listed) 9/21/2018

returns 9/21/2018

Infrastructure Infrastructure Funds Target returns: 10% - 18% annualized over the lock-up period Some of the major players: Macquarie (has been around in this field the longest) Brookfield Asset Management (Canadian) JP Morgan Morgan Stanley UBS Goldman Sachs GE + Credit Suisse 9/21/2018

Commingled Funds Most have minimum allocation of $10-25 million May have as few as 8-10 projects (concentrated risk) Use of leverage: 40% - 60% common, higher for social infrastructure (because of higher credit quality) Fees: Management fees - before 1.5% - 2% , now 1% - 1.5% Carried interest – before 15% - 20% if return > 8% (industry standard), now Goldman Sachs and Macquarie have lowered their carry to 10% 9/21/2018

Commingled funds Carried interest is typically paid when the infrastructure project is sold Cash flow to the fund’s investors (i.e., limited partners) What to do with the cash flow? Closed-end structure, may not be able to reinvest in the fund 9/21/2018

commingled Funds Illiquid assets – timeline different from equities When starting up a fund, have to raise capital Large capital commitment per asset Half of the portfolio can remain uninvested after two years MER is also charged on uninvested commitments, e.g., 0.75% per annum versus 1.5% on invested commitments Supposed to discourage manager from rushing into investments he/she may regret; search cost 9/21/2018

Commingled funds Reporting Governance Quarterly in house valuation Macquarie - DCF model (30-40 years) JP Morgan - DCF model (25 years) Plus EV/EBITDA multiple analysis of similar assets (as a confirmation of DCF valuation) Audited once a year Governance Funds may have an independent Board of Directors, but may also include the LPs on the board May hold an investment for 3 to 7 years

Characteristics of Infrastructure Assets Quasi-monopolistic and regulated The high initial capital outlays act as a barrier to entry. As a result, infrastructure assets have quasi-monopolistic characteristics Because of this and the “public good” nature of infrastructure assets, their transition to the private sector has been accompanied by a high degree of regulation and government oversight The utility industry is a prime example of an infrastructure asset that has been privatized but remains highly regulated 9/21/2018

Characteristics of Infrastructure Assets Demand Relatively inelastic and have few substitutes Stable cash flow For the two reasons above Enables high leverage ratios Long-lived assets Suits pension and endowment funds, foundations…etc. Asset life > 50 years Infrastructure privatization deals are also long-term, lasting anywhere from 30 to 99 years 9/21/2018

Characteristics of Infrastructure Assets Inflation hedge Many leases on infrastructure assets are CPI-linked Hybrid asset Elements of real estate, fixed income, and private equity: Mature, government-regulated utility is analogous to fixed income Developing infrastructure assets in India is analogous to opportunistic real estate development Airports are common in private equity investments (buying the operating companies and improving them) 9/21/2018

Example 9/21/2018

Example 9/21/2018