The writer is a professor in the Institute for Housing and Urban Research at Uppsala University and author of ‘Our Lives in Their Portfolios: Why Asset Managers Own the World’
Amid all the recent turmoil in energy markets, a significant transaction went largely under the radar: the January 2023 acquisition of a controlling share of National Grid’s UK gas transmission and metering business by Macquarie Infrastructure and Real Assets, in a consortium with the British Columbia Investment Management Corporation.
MIRA, one of the world’s leading infrastructure asset managers, maintained that it would be a committed long-term investor, explicitly signalling its intent “to remain invested in the business over multiple regulatory periods”.
One of the main reasons that pension funds and insurance companies typically give for investing in infrastructure is its maturity profile. Their liabilities are mostly long-dated, and they seek long-dated assets to match. Infrastructure fits the bill.
In turn, governments around the world have welcomed pension funds and insurance companies as investors in infrastructure — from energy to water, telecommunications and transportation — because of exactly this professed long-term commitment.
But what happens when such investors invest in infrastructure not directly, but indirectly, via asset managers such as MIRA? This, it is worth noting, is the norm: some three-quarters of infrastructure investment by pension plans in terms of investment value is channelled through asset managers’ unlisted funds.
Macquarie itself has developed something of a reputation for short-termism. Under Macquarie’s control from 2006, Thames Water was repeatedly attacked for underinvesting and for the resultant water and sewage leaks. In 2018, Ofwat, the UK industry regulator, lost patience and fined it a record £120mn. But Macquarie had no need to worry. Having sold its final shares in Thames the previous year, it, as one commentator put it, “had gone, leaving others to take its hit”.
Nor is Macquarie alone in this. Consider KKR’s controversial ownership of the municipal waterworks of the city of Bayonne in New Jersey. Lauded by investment partner United Water for its “long-term vision” upon taking control in 2012, KKR sold out to a storm of local protest just five years later.
Asset managers themselves tend to argue that these are exceptions. In the face of criticism, they insist that ordinarily they are in things for the long haul. In particular, they point to their open-ended, “permanent” or “perpetual” capital vehicles, which have no set lifespan, and which, managers maintain, allow them to plan and invest for the long term.
But most asset-manager investment in infrastructure occurs through closed-end funds with fixed lifespans (normally of 10-12 years), which necessitate asset disposal before the end of the fund’s life. More than 90 per cent of institutional-investor commitments to unlisted infrastructure funds between 1990 and 2020, the vast bulk of which occurred after 2007, were to funds of this type.
This makes asset-manager investment in infrastructure problematic. On the one hand, infrastructure assets, such as real estate, are differentiated from other assets in which the private sector invests precisely by their long-term nature. But on the other hand, the preponderance of closed-end funds encourages short-termism and disincentivises capital spending. Why invest for a future you will not see or profit from?
The managers of open-end funds are no less incentivised by performance fees than the managers of closed-end funds. And to the extent that fund performance is driven by rapid asset disposals — which research indicates is clearly the case — the former will be no less focused on sale than the latter. So much for investing in infrastructure for the long term.