Open-Ended Infra Funds: Advantages and Disadvantages
There has been a noticeable increase in the number of open-ended, or evergreen, infrastructure funds launched by asset managers, both large and boutique, over the past several years.
Infrastructure-focused asset managers are opting for open-ended funds over closed-ended funds for an assortment of reasons, including a longer investment horizon, liquidity opportunities, and fundraising flexibility.
Furthermore, open-ended funds allow investors to know what assets they are investing in, as opposed to a blind pool, where investments are unknown ahead of time, except perhaps seed assets. They can also commit new capital during the fund’s life, set their own allocation timetable, and re-invest based on the acquisition pipeline and performance.
The amount of money raised by private infrastructure funds decreased significantly in 2023. While lower investor sentiment is discouraging for closed-ended vehicles, which may not reach their target sizes, open-ended strategies may face more chilling effects such as gates, suboptimal selling, and even performance issues for the remaining investors, noted bfinance, an investment advisory service provider.
“Open-ended infrastructure funds, however, are weathering the change of climate well so far. Fundraising is down and redemptions have shot up, but the attractions of core/core-plus assets continue to support net inflows,” explained Anish Butani, managing director, private markets at bfinance.
Many investors, particularly institutional investors, have ongoing challenges in reinvesting capital returned to them by closed-ended funds. “An open-ended vehicle allows those investors to stay in the fund without the continual need to subscribe to various and/or new fund vintages,” added Evan Cohen, Partner at PwC Infrastructure, a unit of PwC’s Asset and Wealth Management. “This generally gives investors a form of liquidity should they want to exit the fund.”
Interest in pooled single-manager funds remains a dominant force, but open-ended funds have continued to garner interest, with 32% of investors mentioning them as a target in the next 12 months, according to a Preqin report.
These funds are developing as competitors to closed-end funds, and they are well suited to the lengthy asset lifetimes and consistent cash flows of key infrastructure assets. This is especially true for investors who choose to acquire and hold for longer periods of time than conventional closed-end fund maturities, which can take 10 to 12 years.
“We believe essential infrastructure investments (e.g. utilities, ports, airports, toll roads) with long-term, historically stable cashflows are best suited to open-ended fund structures, so the investor may realize the full potential of the assets through their life cycle,” said Cara Elsley, executive director, IFM Investors.
Closed-ended funds can be more appropriate for core-plus infrastructure projects that offer high returns for a finite term if that’s all the investor is looking for, added Elsley.
Another major reason has been the growing recognition that some infrastructure assets are better suited to an evergreen vehicle than others, which may be more fit for a closed-end vehicle.
“The continued growth and differentiation among new open-end fund launches, especially in sectors such as mid-market, renewables, and so-called infra 2.0, are interesting areas to watch,” said bfinance’s Butani.
“The ‘forever invested’ concept also has the added benefit of boosting investor Total Value to Paid In (TVPI): being continuously invested in open-ended funds over extended periods could theoretically result in a higher Multiple on Invested Capital (MOIC), thanks to the benefits of compounding and the option to reinvest dividends.”
Of course, there are some disadvantages to open-ended funds. The pressure on managers to deploy capital can be significant, especially if fees are based on Net Asset Value (NAV), potentially resulting in a rush of deployment and exposure to vintage concentration and early-year pricing trends for newer funds, explained Butani.
Furthermore, performance fee arrangements based on unrealized NAV might be problematic, however clawbacks and carry ceilings can be beneficial. While the first wave of open-ended funds used a traditional carry structure based on valuation, more recent fund launches have different structured performance fees, with procedures in place to reduce these risks.
Still, managers are eager to deploy capital, and the pricing is attractive. Indeed, the pipeline for open-ended infrastructure funds remains strong with several notable fundraises over the past five months.
Northern Horizon, which specializes in healthcare asset management, announced last month that the firm completed the conversion of its third healthcare fund into an open-ended fund with the launch of Northern Horizon Aged Care Social Infrastructure SCSp SICAV-RAIF.
Partners Group expanded its open-ended evergreen funds lineup with two private markets strategies for the wealth market in March, and Blackrock closed its $1 billion evergreen infrastructure fund that focuses on energy transition and energy security in November 2023.
