What if I had an investment opportunity that could offer you, if it succeeds, steady cash flows over a long-term time horizon and, if it fails, immortality? That’s right. If you lose your shirt on this deal, you’ll probably be compensated with ever lasting life (albeit without a shirt). Such appears to be the case with a new (to me at least) type of infrastructure investment: cemeteries! As you are perhaps aware, human beings will, at some point at the end of their lives, die. And, because more human beings are dying all the time (in line with our growing population), there are some brutishly practical realities that need to be dealt with, such as finding places to bury all of the departed. Indeed, burial space is becoming something of a scarce resource and, accordingly, burial fees are on the rise. And since governments don’t have the money to build new graveyards at present, private investors are stepping in to reap these grim rewards. It seems like a pretty good bet. So long as people keep on dying, investors and operators will have steady cash flows into the distant future.
Anyway, this is one of the many insights I drew from a fantastic conference at Stanford last week. If I’m honest, though, the day-long event, entitled “Infrastructure Investment: Project Level Due Diligence & Analysis”, had nothing to do with cemeteries. (The above tidbit was gleaned from some offhand comments.) Rather, the conference sought to furnish basic information that will help investors “make smart investments in infrastructure”. And, as far as I’m concerned, it was mission accomplished. Packed into a single 10-hour day was almost everything you’d need (or want) to know about infrastructure investing.
My own interest in infrastructure investing has been growing these past few months. This stems from the fact that: 1) there are a lot of parallels between project finance and investment governance; and 2) SWFs are increasingly interested in infrastructure. And that’s reason enough to take it seriously. For example, at the recent Institutional Investor Roundtable in Malaysia, there was a general consensus that infrastructure was one of the asset classes that could be profitably “in-sourced” within large public investors. Moreover, the big institutional investors at Stanford also seemed to be quite keen on developing their own in-house capabilities for infrastructure. In fact, one representative of a public fund (whose name I’ve anonymized to protect the innocent) said, “Why pay all these fund fees if this is an asset we want to hold in our portfolio for the long term?”
I agree. In fact, I’ve already written a post in support of this viewpoint. So, I’ll spare you these thoughts again. Instead, I thought I’d rehearse some of the arguments that came up against in-sourcing infrastructure at this conference. In other words, why SWFs should think twice before they embark on an in-sourcing program.
First, one of the main difficulties (mentioned by a public pension fund representative) was getting buy-in from the ‘powers that be’ for all that can be required for a successful infrastructure investment program. For example, the trustees at this individual’s fund weren’t keen on up-front costs for investment sourcing (i.e. spending millions of dollars in search and due diligence costs) when the result was passing on an investment. But while spending millions on ‘nothing’ may not be appetizing, it’s part of the game. As the pension fund representative said, “We have a lot of growing to do within our organization.” In short, SWFs need to consider whether they have the resources and are willing to commit them to implement an infrastructure practice. If the answer is no, what’s the point?
Second, one of the speakers said, “you’ve got to get the talent. Without it, you’re lost.” And yet, it was also noted that finding this type of talent is very difficult and expensive. Talent in this domain is rare, and public investors operating in a civil service type of human resources arrangement will have considerable difficulty bringing the types of people in-house they need. So, SWFs need to consider whether they can implement a highly sophisticated human resources function that will attract, incent and retain the necessary staff to run this operation.
Third, the skills needed to make an initial infrastructure investment are different from those to manage an infrastructure portfolio over time. Indeed, it was noted at the conferences that there is (apparently) a big difference between a deal team and an asset management team. The former puts the money to work, while the latter keeps it working. So, SWFs need to consider what they are going to do once they reach their allocation levels. What will they do with their deal team? Ostensibly, “exit” for these investments is 30+ years away!
Fourth, investing in infrastructure is highly complex. You are, in effect, going into business with governments around the world for decades. Do you have a grasp on what you are getting yourself into? Do you have the appropriate risk mitigation strategies in place? Do you have a robust financial model? Do you understand the political risks?
And if you think you can answer all those questions with a resounding ‘yes’; boy do I have a bridge I’d like to sell you!