Engagement at a glance
A Canadian foundation with existing exposure to the infrastructure sector sought an unlisted North American infrastructure fund to complement its current holdings. The initial allocation was CAD50m, with target return of 7 - 10%, including cash yield. A broad universe of 61 managers was initially considered, which was narrowed down through qualitative scrutiny and quantitative analysis to ten and then a shortlist of four. Yet the most interesting aspect of this particular search was the final stage, when the investor's (and our) views about the overheated state of today's infrastructure market and the impact of rising rates took precedence. This case study is a useful reminder against allocating purely for the sake of filling a designated 'bucket': there must also be a strong belief that the manager is capable of delivering the returns they anticipate, bearing in mind the current dynamics of the market.
The investor was experienced in the infrastructure space and had previously worked with bfinance. For this search they focused on a number of specific concerns: the rising prices being paid for assets, the potential style drift of managers and the impact of prospective interest rate hikes over the long term. As such, bid discipline and insulation from rising rates were high priorities.
- Substantial in-depth customised research was undertaken towards the end of the search process in order provide greater clarity on the preferred manager’s bid discipline during a period of high valuations. The team scrutinised manager transactions over the past three years and the approach towards pricing, both in deals that were secured and deals that were not won. This included a review of manager investment papers, meetings with deal teams, analysis of the level of indebtedness across portfolio companies, assessing refinancing assumptions and more.
- In addition, we performed a detailed reference-checking process where we sought feedback from existing investors on the manager’s approach, not just as a GP but also as a lead investor on co-investments. This additionally helped us to understand the evolution of pricing during the bidding process.
- As a result, our client gained greater conviction needed in order to justify an investment with the specific manager, despite concerns about the state of the market at the time. Without expert support tailored to their concerns, it is possible that the investor might have chosen not to deploy the investment at that time.