Vehicle selection:
Optimizing Core/Core Plus exposures
Vehicle selection: Optimizing Core/Core Plus exposures
Vehicle selection is an important consideration when deciding how to best access infrastructure assets. Commingled, or pooled funds, are the most common vehicle through which institutions invest. By pooling capital from many investors, commingled funds can provide greater diversification than a single institution could potentially create on its own. Commingled funds can be either closed or open-ended in structure, with the two vehicles each offering distinct features and benefits for investors based on their specific portfolio needs and desired market exposures.
For core and core plus infrastructure investors, the open-end structure is an option that can potentially provide meaningful advantages in terms of liquidity and flexibility to help optimize acquisition, pacing, and exit strategies.
Specifically, open-end vehicles offer the potential for:
J-curve mitigation Open-ended funds are typically seeded with a mature portfolio of established assets that already are generating predictable and stable yields. This provides J-curve mitigation relative to other closed-ended vehicles which are typically blind pools with varied ramp-up phases. The seeded portfolio can also translate into nearer-term income distributions for investors – typically within a year from being drawn down. Open-ended funds can also help smooth out an investment deployment path and balance an existing infrastructure exposure.
Duration matching Open-end funds typically have longer investment horizons than their closed-end peers. This long-term investment horizon matches the long duration of many core and core plus infrastructure assets. Ownership by long-term investors can be beneficial when investing alongside other long-term investors – such as strategic investors – and can help encourage favorable regulatory treatment. A long-term bias also provides a manager discretion on when to invest and divest assets, allowing them to capitalize on market conditions and ensure there are no forced divestitures of their best and most prized assets.
Opportunity access The long-term time horizon of open-ended funds provides the opportunity to invest additional capital into an existing investment as a platform for future growth. Investing more capital into portfolio companies can provide the opportunity to participate in future transactions as a quasi-strategic investor and to potentially gain access to opportunities that may not be available to traditional financial investors. The opportunity to participate in off market deals with potential synergies allows open-ended funds access to a wider opportunity set and potentially less competitive processes.
Enhanced liquidity In contrast to closed-end funds, open-end fund investors can typically request to have their interests redeemed on a pre-determined and periodic basis, typically quarterly. Open-end investors also have enhanced flexibility and can use the vehicle as a portfolio completion or rebalancing tool, either by utilizing the quarterly redemption feature for liquidity or investing more capital over time.