Adriaan van Jaarsveldt, General Manager Regulation at Prime Infrastructure, which has interests in a number of essential infrastructure assets in the energy, rail and ports sectors, gave a speech discussing where the current asset manager model had gone wrong and what investors were looking towards in the future.

Mr van Jaarsveldt commenced by saying that the global financial crisis (GFC) had killed the traditional asset manager model; that the model no longer met investor expectations; and, investors were not convinced asset managers’ interests were aligned with theirs. He said the long-term nature of infrastructure assets made it problematic to apply the short-term focused private equity model of buy, increase value and sell.

He highlighted that the challenge to asset managers was to fix or abandon the asset manager model via the alignment of managers’ and investors’ interests.

“The vehicle that provides the most direct route to the asset will be most successful,” Mr van Jaarsveldt said, also noting that it was “time to strip away all of the financial engineering and get back to the underlying assets”.

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Mr van Jaarsveldt identified problems with the traditional asset manager model as:

  • Sustainability of distributions, with distributions sometimes being made from capital;
  • A model, which requires perpetual growth, worked well when debt was easy to obtain, unlike the situation in the GFC;
  • Provides incentive to ‘over-pay’ for assets;
  • Fees decoupled from underlying cash flows of assets; and,
  • Complexity and opaqueness of funds arrangements.

Turning to the future of infrastructure investment funds, he said a new model should:

  • See investors invest as directly as possible in the underlying asset;
  • Use pure equity to make acquisitions, with conservative gearing at the asset level;
  • Have structures that are transparent; and,
  • Align the manager’s remuneration directly with investor returns.

He also highlighted the need for investors to have the ability to participate directly on asset boards. He said that management expertise in areas such as operations, regulatory and commercial management was needed for infrastructure fund managers, not just finance or merger and acquisition skills.

He said that infrastructure should generally be considered an investment purchased for yield, rather than for high, rapid capital growth. This should not deter investment in infrastructure, as ‘boring’ low-growth businesses often deliver superior results in the long run.