While there is no substitute for personal interaction, infrastructure investors might have to get creative in order to adapt to a post-Covid-19 scenario of restricted travel.
The business world is made up of networking and personal relationships. That is particularly true for fund capital raising, where investors essentially hand over to managers the responsibility of investing their money.
As the Covid-19 outbreak hit, questions immediately arose in the infrastructure community regarding how travel bans and lockdown measures would impact the relationship-building process that underpins global capital raising.
Nearly three months later, the outlook is not completely negative, but many warn that it is too early to claim victory and they do not expect the market to hit the record levels in 2020 that it has enjoyed in recent years.
Video due diligence
The unlisted infrastructure capital raising industry has been on a high for the past five years, with 2018 and 2019 closing at roughly $120bn and $96bn, respectively. When Covid-19 struck, fund managers were about to close a healthy first quarter for 2020, with some $45bn in capital raised globally.
“We had been very busy coming into Covid-19 as we had a number of clients still looking to make commitments in infrastructure and private markets more generally,” says Anish Butani, senior director, infrastructure, at Bfinance, an investment consultancy firm that helps investors select fund managers. “Those investors who already had their investment committee’s approval or were halfway through that process were able to sign off on fund investments. Overall, the fund investor community has adjusted fairly quickly to conducting the final stages of due diligence in a virtual capacity.”
“Although we have not been able to meet fund managers in person, we have continued conducting due diligence as normal,” says global head of infrastructure research at Willis Towers Watson (WTW) So Yeun Lim. “For instance, we have been focusing more on sensitivity analysis of the economic outlook that is likely to emerge from this crisis and how it will impact our investment strategy going forward.”
Lim points out that some parts of operational due diligence have been more affected by the virus outbreak than others.
“Going to managers’ offices to check their physical facilities is also part of due diligence for new managers,” she says. “Our team is thinking of creative ways around this and is using live video calls as well as considering using Google Earth to view managers’ premises, for instance.”
As creative as due diligence teams can be, however, the consensus remains that there is no real substitute for personal interaction in the infrastructure capital raising world.
“Fund managers need to build new relationships to continue to thrive,” says Butani. “Covid-19 has proven that part of the due diligence process can be conducted virtually, but going forward both managers and investors will still need to rely on personal meetings where they can read body language and build personal trust.”
The lack of face-to-face meetings has led to many investors favouring their existing relationships. Two managers to have closed on capital commitments during lockdown are US-based Stonepeak Infrastructure Partners, which reached a $7bn first close on its third fund, and UK-based Arcus Infrastructure Partners, which concluded fundraising at €1.22bn on its second vehicle. Both could count on commitments from their existing investor base and, in Arcus’s case, some capital commitment loss had to be accepted.
“We signed off on final close on our second fund just before Easter and we found ourselves in a favourable position as most of our investors had obtained investment committee approvals before lockdown,” says head of investor relations at Arcus Stephan Grillmaier.
“Where investors had not obtained investment committee approvals, though, due to the global pandemic situation, it resulted in some investors not being able to complete the process,” he adds.
However, Grillmaier says Arcus remains confident about demand for European mid-market infrastructure and says it does not expect a shortage of capital.
“It is likely, though, that most capital will gravitate towards experienced managers or managers who follow very specialised strategies that are complementary to investors’ underlying portfolios,” he concludes.
This concentration phenomenon, which is not new to the infrastructure fundraising market, is set to grow as travel is unlikely to resume at pre-Covid levels any time soon, making investors more hesitant to sign off commitments on new managers.
Investor sentiment and sector focus
While the post-Covid fundraising environment may not be a favourable one for first-time managers, it could prove beneficial for experienced managers launching new and more specialised strategies.
“Investors are starting to do more granular analysis to identify the type of infrastructure assets that are going to be more resilient in the post-Covid world,” says fund formation lawyer at Weil, Gotshal & Manges James Sargent. “Certain types of transport assets are likely to face challenges, for example, whereas digital infrastructure assets and renewables assets are expected to be more resilient and still prove to be popular.
“The specific sectors and asset types that managers have experience investing in is therefore starting to come under more scrutiny than it may have done pre-Covid, and as a result we are already seeing some generalist fund managers starting to pivot more towards these sectors.”
Regardless of track records and the ability to shift to new strategies, managers are likely to face challenges in raising capital throughout 2020. With uncertainty surrounding any possible Covid-19 recovery, many investors have decided to halt new investments until certain factors become clearer.
“We have heard from some managers that their fundraising activity was slowing down because investors were instructed by their CEOs to halt investment decisions until a fair assessment of the crisis’s impact on existing portfolios could be made,” says WTW’s Lim.
Indeed, the infrastructure investor base is divided among those who stopped investing; those who are only investing in known managers and strategies; and a few who see the crisis as an opportunity to invest at more favourable terms.
“Investors in the first group essentially do not know whether we have seen the worst of this crisis yet and do not know what their liquidity requirements are going to be over the next few months,” explains Weil’s Sargent. “Many are concerned about their existing funds and managers needing more money to address previously unexpected funding requirements of their current portfolios, and believe they may see more recycling of distributions in their current funds to address those needs.
“As a result, there is uncertainty over the distributions they are likely to receive over coming months, which makes it hard for them to estimate how much capital they can commit to new funds.”
What seems almost certain is that the volume of capital raised in 2020 will be significantly lower compared with 2019. And while relying on existing relationships might be enough in the short term, both managers and investors will be forced to find creative ways of conducting first-time due diligence in the long run.