The New Era of Infrastructure Investing

Abstract

Insurance companies, pension funds, sovereign wealth funds, endowments, foundations and family offices all have the ability to invest over inter-generational time spans. This is a unique competitive advantage in markets for long-term, illiquid assets, such as infrastructure. And yet, despite a clear affinity for this asset class, a variety of constraints are preventing these investors from taking up their theoretical place of prominence in the market for private infrastructure. Many of the constraints stem from the time-inconsistency and principal-agent problems embedded in the third party fund management model. In a bid to circumvent these hurdles, some funds have launched in-house investment teams to invest in infrastructure directly. However, before these ‘in-sourcers’ can reap the rewards of such an approach, they have serious challenges to overcome. This paper thus offers insights into how institutional investors can establish internal programs. In particular, we provide specific details about the challenges of direct investment programs and offer suggestions as to how these challenges can be overcome. However, while we conclude that direct investors are the future of infrastructure investing, fund managers will still have a crucial role to play in the markets development. This may warrant a re-conceptualization of intermediation, but, ultimately, this will lead to a revitalization of the asset class and, we expect, a new era of infrastructure investing.

Keywords: Sovereign Wealth Funds, Pension Funds, Infrastructure, Investment Governance