Value added activities in infrastructure investment?
Hello everyone,
I am learning about the infrastructure investment (PE infrastructure and institutional investment types) and it seems to be the next big thing. But I was wondering how would one add value (ie: getting higher IRR, or increase potential earning of an acquired asset)? I know that PE infrastructure is not like traditional PE, where you can add value on the operational side, but is it true that your potential earning is pre-determined when you acquire an asset?
Thank you,
Kami
I would be curious to know as well. Great question.
Anyone has experience in infrastructure, please shed some light on this topic.
Thank you,
bump
The short answer is that it depends on the infrastructure fund's strategy and its target IRR. If it is a "core" infrastructure fund that only invests in mature assets/companies with long-term contracts, then it is true that there is a very limited ability for the investment team to get involved with portfolio operations/strategy. These funds are generally targeting IRRs in the high single digits. However, there is a group of "opportunistic" infrastructure funds that target IRRs in the mid to high teens and achieve these IRRs by taking more of a private equity approach to infrastructure investing. What this means in practice is acquiring assets/businesses that perhaps have been mismanaged or aren't fully utilized. One good example of this is if an infrastructure firm carves out a midstream gathering system from an integrated E&P and subsequently markets the system to 3rd party producers i.e. turns it into an MLP. Another example is if a fund is willing to invest in earlier stage greenfield projects. The investment professionals in such a scenario will get involved in "operations" by giving guidance to the developer and generally helping the developer through the permitting, contracting and construction of an asset. Long story short, make sure to do your research on the specific fund's strategy as infrastructure strategies today range from very passive to very hands-on and operational (with target IRRs varying in tandem with the strategy).
Hi everyone, thanks @financeguy9999 for the interesting comment.
I'm kinda new to this stuff so I'm wondering how does having a fund get involved in the operational aspects help to increase IRR? Is it because the operational/technical expertise that the fund gets helps to decrease cost and expedite the time or are there other factors in play? Cos' I'm skeptical that having an external player come in during the construction of the project can make such a big difference..
Would appreciate any thoughts! :)
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