Of classic cars, fine wines and vintage infrastructure funds

Private Equity 09 Aug 2010

Unless one is an aficionado of classic cars and fine wines, the term vintage doesn’t often resonate, particularly when it comes to alternative investments. On the contrary, “vintage” conjures up images of old, stale and beyond prime – and not in a good, higher-basis-point-return kind of way.

Yet a recent report by Preqin entitled “Is Infrastructure Living up to Expectations?” (click here to download) nicely illustrates how “vintage” can work in investors’ favor, in particular when it comes to funds that invest in roads, bridges, tunnels and other good building-block stuff.

Indeed, beyond the post-crisis multi-billion-dollar spending binge underway in almost every country in the world, Preqin notes that infrastructure funds with a much older “vintage” – those that were putting money to work on infrastructure-related projects long before the 2000 financial market meltdown, never mind 2008 – exhibit better signs of long-term positive performance than newer ones.

To illustrate, Preqin uses the chart below to show the median net investment rates of return (“IRRs”) since inception for infrastructure funds of vintages 1993-2007, as well as the maximum and minimum net IRRs for each vintage year.

What the chart tells us is that infrastructure funds with a vintage 1993-1999 have yielded an 11% median net IRR, which increases to 15.8% for funds of vintages 2000-2004. The graph also shows that infrastructure funds have the potential to achieve a net IRR well above 20%, similar to many private equity vehicles.

In other words, just like a fine wine, the older the vintage the better.

The good news is that even the newer stuff isn’t that bad, and exhibit pretty good indications of ripening with age if left on the shelf for an extended period. According to Preqin, more recent vintages have multiples of around 1.0x, “which is again expected to improve as these funds mature, and is at least in part a reflection of the J-curve,” the report says.

Of course, how one invests in infrastructure and with whom is just as critical as for how long. While talk of building roads, bridges and tunnels to nowhere has had many licking their lips over potential infrastructure investments over the past year or so, in practice the efforts of sourcing an experienced manager with a proven track record and the skill set to know and allocate well in advance – not to mention the patience to let it age gracefully – is as difficult as any other.

In short, and to coin a cliché, patience is clearly a virtue if one is serious about infrastructure as a viable alternative investment. Then again, finding a classic car or a good case of wine and storing it somewhere safe for 10 or 15 years could yield equal if not better results.

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