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Citi Perspectives for the Public Sector
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2015 – 2016
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European governments began to privatize
core infrastructure assets following the
financial crisis, thereby increasing the
opportunity set. Additionally, given rising
concerns for a lower long-term bond yield
environment and the potential for increased
inflation, return profiles of infrastructure
investments started being viewed as a
substitute for fixed income securities.
Similar to their initial investments in
Private Equity, most GIFs gained exposure
to infrastructure through private-equity
style infrastructure funds; however, as their
expertise in the sector grew, the larger
investors bypassed the traditional third-party
fund method and began to invest directly
into infrastructure. This strategy provided a
greater degree of control on where to spend
capital, where to dedicate internal resources,
and resulted in eliminating the need to pay
management fees to third-party managers.
The Canadian Pension funds have been
investing directly in infrastructure for over
a decade. As the size of transactions has
increased, they have started serving as lead
investors in consortia, most often comprised
of other GIFs. This has provided many new
entrants into the infrastructure investing space
to partner with a credible peer, with the ability
to lead in the diligence and management of
assets post-closing, without being charged
fees that would be required by infrastructure-
focused private equity firms. In addition, the
return requirements of most GIFs for the
infrastructure asset class are significantly
lower than those required by third-party
infrastructure funds, which helps them remain
competitive when pursuing assets.
Additionally, we believe that new GIF entrants
from the Emerging Markets can also leverage
existing and new government relationships with
other GIFs to establish co-investment and JV
funds to invest in their domestic infrastructure
sector. Often, many of such Emerging Markets
countries have been unable to attract critical
foreign direct investment in the country’s
infrastructure because of concerns about
transparency and difficulty in undertaking
transactions. GIFs in such countries can serve
as “partner of choice” for their international
peers and serve as a catalyst to attract
infrastructure investment in their countries.
Closing
In the last few years, many GIFs have
strengthened their internal investment
capabilities to be able to expand the scope
of what they are able to invest in and access
directly, without outsourcing to third-party
asset managers across the Alternatives sector.
While alternative asset managers will continue
to attract capital from the newer, small and
medium-sized GIFs looking for exposure to the
space, we believe that many of the larger GIFs
will look to continue building their internal
teams to invest in the space directly. Given
GIFs’ desire to gain additional exposure to this
asset class, Citi is well-positioned to assist
them across a number of areas. Citi has a
local presence in over 100 countries, and has
partnered, across a range of Corporate and
Investment Banking, Markets and Transaction
Services products and solutions, with most
of these GIFs from their inception. Citi has
taken a lead in building a globally coordinated
coverage effort for this group of clients and as
such, Citi remains committed to GIFs and their
focus on Alternatives. We believe this initiative
will remain an important one in the portfolios
of both recently established funds and the
already established GIFs and we look forward to
assisting our clients in fulfilling their objectives
in the near future.