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Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson
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Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class? - Presentation: Towers Watson

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For more information contact: emailus@marcusevans.com …

For more information contact: emailus@marcusevans.com

Towers Watson a speaker at the marcus evans Canadian Institutional Investment Summit Fall 2011 in Quebec, delivers his presentation on Capitalizing on Infrastructure Projects in Canada – How Do Mid-Market Institutional Investors Gain Exposure to This Asset Class?

Join the 2014 Summit along with leading regional investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping wealth management strategies today.

For more information contact: emailus@marcusevans.com

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  • 1. Infrastructure InvestingA presentation to the Canadian Institutional Investment Conferenceby Marcus TurnerOctober 19, 2011© 2011 Towers Watson. All rights reserved.
  • 2. Backgroundtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 1 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 3. What is infrastructure? Infrastructure assets are the physical structures, facilities and services needed for the proper functioning of a community or society  Economic Infrastructure: User is willing to pay for service  Social Infrastructure: User expects government to provide service SOCIAL ECONOMIC INFRASTRUCTURE INFRASTRUCTURE TRANSPORTATION UTILITIES COMMUNICATION GOVERNMENT SERVICES Airports Electricity Wireless Towers Hospitals Bridges Gas Cable Prisons Railroads Water Satellites Transport Toll Roads Bio Fuels Schools Ports Social Housingtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 2 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 4. Stages of investment ECONOMIC INFRASTRUCTURE SOCIAL INFRASTRUCTURE Build: Government or private company sells Build: Government sells the opportunity to the opportunity to build an infrastructure build an infrastructure asset to a private asset to a private investment consortium investment consortium Maintain and Operate: Consortium collects Maintain and Operate: Private Public revenue from the asset for a fixed period of Partnerships (P3s) are typically partnerships time (often a very long term lease) between the private and public sector  Provision of services typically remains the  User fees typically inflation indexed responsibility of the government  Income stream is provided by the government as a payment for making the asset available for a defined period of time at an acceptable standard  Income stream is often inflation indexed Transfer: After the fixed period of time the consortium will transfer the asset and all operating responsibilities to the governmenttowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 3 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 5. Types of infrastructure GREENFIELD BROWNFIELD  Projects are new developments  Infrastructure has existed for some time  Relatively high level of business risk  Predictable income stream (often linked including construction risk, uncertain to inflation) growth rates and early term operational risk  Typically no cash flows until about fourth or fifth year (J-curve effect)  Typically have greater capital  Moderate capital appreciation is possible appreciation opportunity (usually through capital improvement), but mainly purchasing long term cash flow  Investors are expected to be  Return expectations are lower than compensated for the risks associated with greenfield investing although income new development projections are more reliabletowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 4 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 6. Why Infrastructure? Manager return projections are in the mid to Potential for attractive equity- high teens, but even 8% to 10% would like returns, but with much compete well with equities over the long- lower risk term. Attractive premium (>4%) over bonds backed by tangible assets Long-term investments in regulated and/or Reliable cash flow and less contracted industries with mostly inelastic sensitive to economic user demand downturns Cash flows mostly insensitive to changes in Inflation Protection expected inflation. Agreements allow general partner to raise user fees at a minimum to cover inflation increases A real return asset with high correlation to Diversification inflation and low correlation with equities and nominal bonds. Complementary to real return bondstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 5 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 7. What are the key risks? Risk are not greater than that of other asset classes; they are manageable and can be mitigated with proper controls: Risk Risk Mitigations Demand & Usage Risks: Overly optimistic user forecasts can  Experienced managers/consultants are essential to budgeting impair projected returns process as is robust sensitivity analysis Political Risks: Political instability may lead to asset  Managers can invest with local governments and other domestic repatriation. With Social Infrastructure there is a risk the partners having ex-policians as part of the consortium to help government counterparty may default on its obligations navigate political process  Experienced managers can use established relationships to manage risk more appropriately Interest Rate Risks: High degree of leverage exposes  Seek longer term debt financing infrastructure to adverse interest rate movements  Can hedge some exposures  Inflation linked revenues mitigate this risk  Investments are generally high quality assets that are critical to the economy and can thus justify leverage Currency Risks: Infrastructure investments generate  A currency hedging program can mitigate this risk revenues in currencies other than the investors domestic currencies. Liquidity Risks: Investment locked-up typically for 10 - 20  Proper legal documentation can define the terms of entry and exit years, although cash flows are received during this period  Liquidity is a lower order consideration as infrastructure is a long term investment and many pension plans may not need to be fully liquidtowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 6 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 8. Types of Infrastructuretowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 7 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 9. What do we want from core economic infrastructure The following wish-list forms the body of a paper to be released to clients and managers Clear, succinct definition Regulated, long-term contracts or truly monopolistic Operational and robust Realistic and sustainable High single digit, risk-adjusted returns target returns Significant yield (rather than capital appreciation) Reasonable leverage Leverage used for tax benefits and for optimal portfolio diversification Price discipline The reduction in expected returns should be as a result of lower risk, rather than paying more for the asset. Strong alignments Appropriate level of risk-taking eg. No carry/or carry on yield Longer term vehicles Open ended (evergreen) structures Long term close ended structures Robust no-fault divorce Well defined ability to take control of the assetstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 8 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 10. PPP / PFI – too good to be true?Lowest risk Public Private Partnerships (PPP) / Private Finance Initiatives (PFI) are concessionsassets within provided by the government or a quasi-governmental agency to provide an essentialinfrastructure service to the community. Perfect for pension schemes with a long-term horizon because:  Long term assets  Stable cash-flows, with no demand risk (revenue based on government contract)  Little operational risk (easy to manage assets)  Inflation-linked payment streamstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 9 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 11. PPP/PFI – the risksHighest Stage Risk How are these risks mitigated for our clients risk Bidding risk The risk that either you do not win the project in Our clients usually are not involved in at this the competitive process undertaken or that the stage project you are bidding for does not even go ahead Construction The risk that there are cost over runs in the Water-tight contracts, where payment is only risk building of the asset, or that the asset is late provided once the asset is complete. Penalties being delivered, resulting in penalties are passed onto the construction firm. Does mean that there is counter-party risk with the construction firm, so credit analysis is key Sub- The risk your sub-contractor goes bust, and the Credit analysis is key. However, most contracts contractor cost to replace them is greater than what has have a 5 year review mechanism to ensure that risk been budgeted. affordability is maintained over time Financing As highly geared projects, there are risks that This is a real risk, however given the risk small deviations in cashflow can significantly management of the other risks discussed here, affect equity holders returns deviations of cashflow are usually minimal. Some level of buffer is provided within the capital structure Deduction The risk that the concession holder does not Water-tight contracts, where these deductions risk perform the required duties at the standard are passed onto sub-contractors. Credit analysis required, resulting in deductions. is keyLowest Usage risk The risk that the asset, once constructed, is not Not relevant to the equity holder, this risk is risk needed anymore taken by the government towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 10 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 12. Does listed infrastructure provide core infrastructure characteristics? Stability of earnings -  Appropriate use of leverage -  Sector Gearing1 Gearing2 % Hedged Toll Roads 46% 51% 69% Airports 37% 44% 90% Ports 14% 23% 60% Strong yield -  Source: Brookfield Utilities 48% 62% 82% Communications 58% 57% 96% Diversified 58% 70% 66% Average 44% 52% 76% Source: Magellan Infrastructure Fund portfolio - based on the most recent available data for companies in the portfolio (either as at 30 June 2009 or 30 September 2009.) 1 Debt to Book Enterprise Value 2 Debt to Market Enterprise Value (market capitalisation used for Shareholders Equity)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 11 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt Source: Brookfield
  • 13. Does listed infrastructure provide diversification Does provide Limited data, but a longer history in Australia some diversification Timeframe Better diversification before financial crisis dependant Time period Correlation Average 3 years between 31/12/2002 and 31/12/2007 0.49 Average 3 years between 31/12/2007 and 30/09/2010 0.87 Total period between 31/12/2002 and 30/09/2010 0.81 Beta A number of studies have suggested infrastructure assets have an underlying beta of 0.4towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 12 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 14. Evolution of the Markettowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 15. Market opportunity Global infrastructure investment demand estimated to be between $1 trillion1 and $3 trillion2 annually. Partially met by Government, but still a significant opportunity for private sector to profitably participate alongside Government or independently to stimulate supply of new assets and renovation of existing ones.  Key drivers of the infrastructure market opportunity for private capital  Direct correlation between infrastructure investment and GDP growth  Historic under-investment  Growing pressure on public finance  Aging population with more people relying on infrastructure and fewer people contributing to government budgets  Increasing urbanization, congestion and quality of life issues  Heightened energy and environmental concerns; and  Growth in emerging markets (require infrastructure investment to maintain a stable level of growth or to accelerate a country’s growth rate) Expectations of significant long-term growth in private infrastructure finance * Source: 1. Global Infrastructure Demand Through 2030, a study by CG/LA Infrastructure in Association with Sterne Agee, March 2008. 2. Infrastructure to 2030, Volume 2, OECD publication, 2010towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 14 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 16. Fund-raising 2010 saw a Following a tough environment for fund- rebound in raising in 2009, it rebounded slightly in 2010 fundraising with over USD27 billion committed to infrastructure funds. A significant proportion of this comes from funds of over USD1 billion is size Source: Prequin 2011 sees a A number of high profile managers coming number of back to market managers coming back to markettowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 15 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 17. Infrastructure has shown stability of earnings over time Robust asset Over the 2008/2009 period, an environment where overall economic performance was generally poor, performance infrastructure assets generally produced robust operating performance Particularly impressive was the pricing power exhibited by these infrastructure assets over the period Poor structures However a number of assets in private fund ownership, despite these robust earnings, have experienced poor has harmed some equity returns due to poor (or inadequate) capital structures. The use of significant leverage and optimistic equity returns growth assumptions have led to some infrastructure equity holdings not performing as expected Note: MEDIAN EBITDA; Source: Brookfield, June 2010 Global infrastructure is the Dow Jones Brookfield Global Infrastructure Indextowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 16 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 18. Why is now a good time to commit to infrastructure We are still in the The capital structures of infrastructure assets have come early stages of de- under significant stress, post crisis, as debt providers, leveraging in the have become less willing to provide cheap credit. sector. Market believes that this will lead to a large adjustment in the financial structures of individual deals (as shown on the right), while this general trend may also lead to other opportunities for the providers of capital: • recapitalizations (including public-to-private transactions and management buy-ins • distressed sales of assets (rather than sales of distressed assets) • mergers and termination of funds • discounted secondary units in pooled funds Source: Aladdin Other current • Potential for strong inflation linkages in a period where infrastructure pros inflation may be an issue and cons include: • Significant fiscal pressure on governments, with a requirement to boost public expenditure. This could lead to sale of assets or new deal-flow in infrastructure • Asset-backed debt holders may own foreclosed assets but lack the expertise and capital necessary to maximise recoverytowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 17 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 19. Pricing of assets offers opportunities Asset values Infrastructure equity was marked down heavily over the financial crisis. The graphic below demonstrates the have historical valuation of infrastructure assets (as represented by the Brookfield Dow Jones Index) in the listed market. rebounded off financial crisis lows… Source: Brookfield …and are More assets are coming to market as vendors and purchasers of infrastructure assets alike can value assets with approaching greater confidence. historical normstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 18 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 20. Debt is returning to the market The debt lent to Deals slowed over 2009/2010 due to less debt being made available on similar terms to pre-credit crisis (i.e. infrastructure assets debt was more expensive). The graphic below shows the amount of project finance debt provided to over 2009/2010 was infrastructure assets over time significantly reduced on previous years Source: Berwin Leighton Paesner Debt markets seem to • Lending has resumed, but is more expensive than pre-crisis be responding more • As confidence returns to the market, financial costs are improving favourably to infrastructure projectstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 19 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 21. Infrastructure Portfolio Constructiontowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 20 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 22. Investment stages and time lags Due to the nature of infrastructure investing, the amount committed by investors will not be immediately invested in the asset class. Client Stage 1: • Client must identify underlying managers Infrastructure manager Stage 2: • Manager must identify underlying assets Underlying assets • Subsequently the manager must add value and implement an exit strategy. Infrastructure is a long-term strategy – the expected life of a fund commitment can be 10-30 yearstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 21 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 23. Infrastructure fund life cycle –Timing investment Look for good (‘cheap’) opportunities to buy companies “J curve” impact as investments sourced, fees paid on commitments Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Look for opportunities to generate current yield from cash flows and capital gains from sale Given the timelines, it is challenging to ‘time’ investments in infrastructuretowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 22 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 24. Typical investment structure: Limited partnership Most infrastructure investments are structured as limited partnerships  General partners (managers) are responsible for reviewing deals, making investments, and managing/monitoring those investments  General partners are compensated through a management fee (1% to 1.5% of committed capital); often also a “carried interest” of about 20% of total return  Limited partners (investors) are responsible for providing committed capital — Limited partners’ liability is limited to capital provided — Limited partners share in a pre-determined split of the profits, typically 80%towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 23 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 25. Fund structure Historically, most infrastructure funds are ‘closed-end’ funds, which are operational for a fixed period of time (eg 10-20 years)  Some funds are structured as ‘open-end’ or ‘evergreen’ funds, where the manager does not automatically dispose of assets and investors may continue to benefit from the cash flows over the longer term. Investors are potentially exposed to liquidity events, which may result in proceeds from asset sales being returned to investors at times that are inconsistent with their objectives  You may get your money back quickly resulting in a portfolio that falls behind your strategic allocation Many funds have a “roll-over option” where investors have a right to switch to an ‘evergreen’ listed vehicle at the end of the closed-end fund life  The actual implementation of this structure is yet to be tested Fund structure considerations are important but should be secondary in their importance to the assessment of a manager’s skill to source and operate infrastructure assetstowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 24 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 26. Fees Fees should be commensurate with risk taken i.e. expect to pay more for development, Brownfield assets than core infrastructure Managers’ Fees:  1.0% to 1.5% of committed capital  To cover operating expenses of Fund Performance Fee (Carried Interest)  Typically 20% of total return on invested capital, but only after investor has received a hurdle rate of return (typically 8%)  For example: — If Fund returns 20% – Investor gets 16% – Manager gets 4 % — If Fund earns 8%, manager gets no performance fee Infrastructure is expensive; however fees are coming down.towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 25 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 27. Implementation considerationsThere are a number of practical considerations that should be evaluated:Staffing: Infrastructure assets may require additional pension fund resources for monitoringCash Flow: Infrastructure assets can generate significant cash flows that must be managed within your overall asset allocation frameworkCurrency: Currency hedging may be considered as many managers will participate in non-domestic marketsValuation: It is essential to be comfortable with a managers’ valuation approachReporting: It is important to consider the types and frequency of reports you will receive from managers to ensure it meets your requirementsAsset Mix: Illiquid nature of the asset class means you may be over or above your target infrastructure allocation and it typically cannot be adjusted quicklytowerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 26 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 28. How can it be benchmarked? A diversified benchmark for global direct (not publicly traded) infrastructure does not exist Benchmarks for publicly listed infrastructure companies  High correlation with public equity markets — Macquarie Global Infrastructure Index — Moody’s Economy.com Infrastructure Index — UBS Global Infrastructure and Utilities Index with Standard and Poors For global direct infrastructure can consider:  An absolute rate of return (e.g., CPI + x%)  Listed index adjusted for return volatility and leverage ratios e.g. (Dex Index + %)  Absolute return (e.g. 8%)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 27 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt
  • 29. Summary: Pros and Cons of infrastructure Advantages of infrastructure Disadvantages of infrastructure  Returns can be driven by:  High fees  Equity risk premium – albeit  Illiquidity muted  Regulatory/political risk  Illiquidity premium Infrastructure is challenging, but  Concentration risk  Activism premium worth considering:  Investment risk – this is not a bond  Information premium substitute - diversification  Diversification benefits: benefits  Governance challenges  Less sensitive to economic - attractive returns  Selection risk cycle than with equities - stable cash flows  Unfamiliar vehicles  Low expected correlation with other assets - inflation protection  Speed of decision-making  Liability ‘matching’  Managing cash-flows  Generation of reliable cash  Data problems flows which are often linked to  Monitoring managers inflation (depends of type)  Managers may have conflicts  Long duration (although of interest depends on vehicle used)towerswatson.com © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 28 V:_Towers Watson Internal11ACSMarketingCII ConferenceInfrastructure Investing Final.ppt

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