A paper written way back in 2007 when listed infrastructure funds were still all the rage.

1. IBUS6015: INNOVATION AND ENTERPRISE SPECIAL PROJECT
WORKING RESEARCH PAPER
Infrastructure funds and the
macroeconomic drivers of
entrepreneurial asset
packaging:
the Australian experience
Matthew Bright
SID: 200006022
January 2008
The inception of the first listed infrastructure fund on the Australian Stock Exchange in December 1996,
Macquarie Infrastructure Group, was a structural innovation which pooled illiquid infrastructure assets
into a liquid investment vehicle. This new product was developed in response to a facilitative
macroeconomic climate in Australia at this time of equity market momentum, lower bond yields and low
inflation, which occurred after a period of recession, Government asset privatisation and foreign banking
deregulation. This paper studies how Australia’s macroeconomic climate at that time and in the ensuing
ten year period from December 1996 to December 2006 facilitated entrepreneurs’ perception of profitable
opportunities and decision-making in new product development and decision-making by corporate
entrepreneurs. It highlights significant correlations between corporate activities and macroeconomic
cycles.

2. Introduction
Infrastructure funds are today a prominent part of an emerging asset class in global financial
markets in both established and emerging economies. In the fifteen months to July 2007, seventy
two new infrastructure funds raised US$120 billion of capital commitments globally (Orr, 2007).
These funds operate on sector-specific or diversified investment mandates and are managed by
asset managers, private equity fund managers or large investment banks undertaking proprietary
investments through dedicated business units.
Such fund raisings are indicative of financiers’ desire to invest in the infrastructure space, where
there was earlier estimated to be an $8.5 trillion backlog of infrastructure worldwide to be
delivered by 2010 (Faye and Tito, 2003) and a $1.6 trillion backlog in the United States alone
(Orr, 2006 and RREEF, 2006), with extensive opportunities for private sector participation.
World Bank estimates have previously valued the world’s infrastructure stock at US$17 trillion
(UBS, 2006), including listed, unlisted, private and state-owned assets.
In order to understand the fund raisings and transactional activities of infrastructure funds in the
current investment climate, it is pertinent to examine the origin of the infrastructure fund model,
the macroeconomic and supply/demand factors which spawned its inception in Australia in the
1990s where the first infrastructure fund was conceived, developed and exploited. Australia is
one of the most mature markets for infrastructure in the world, with the asset privatisations
which took place in the 1990s having spawned an enduring investment phenomenon.
This paper analyses the macroeconomic factors which enabled the entrepreneurial proprietary
innovation by listed infrastructure funds (and their parent companies) between December 1996
and December 2006 by the managers of two of the seven pioneering funds identified by the
2

3. Collaboratory for Research on Global Projects, Stanford University (Orr, 2007), including
Macquarie Bank Limited’s Infrastructure and Specialist Funds (ISF) business unit (a first
mover); and Babcock and Brown Limited, an asset manager (a fast follower). These investment
firms are the two dominant, domestically-headquartered, globally-active players in the
infrastructure funds business which undertake proprietary investments in infrastructure assets
and securitise these assets through their infrastructure fund vehicles.
Existing academic literature on infrastructure funds centres on issues such as the significance of
infrastructure in investment portfolios (Peng and Newell, 2007); and the political economy
considerations associated with privatisation, public private partnerships (PPPs) and securitisation
(Jeferris and Stillwell, 2007); whilst extended media coverage has dwelled on controversial
microeconomic considerations associated with infrastructure funds such as fair value accounting
methodology, fee structures, capital structure, sustainability (Chancellor 2007, Haigh, 2007 and
Maclean, 2007). Analysis has thus far neglected to examine the macroeconomic climate which
facilitated the entrepreneurial opportunity to capitalise on the transition from public assets to
private ownership and transferral to shareholder ownership.
In 1996, a triad of macroeconomic trends including low inflation, constant bond yields and
upward domestic equity markets momentum, coupled with the Australian Government’s policy
revision towards infrastructure ownership and development facilitated Schumpeterian creative
destruction by Australian investment banks and spawned the birth of infrastructure as a discrete,
alternative asset class.
Analysis in this paper is directed towards how macroeconomic phenomena impacted the original
inception and subsequent performance of infrastructure funds from December 1996 to December
2006 in Australia, one of the most mature infrastructure markets in the world. A typical
3

4. invention/innovation/diffusion process occurs in this period, where the innovating operator of
infrastructure funds, Macquarie Bank, conceives and exploits the infrastructure fund model,
commencing with Macquarie Infrastructure Group in 1996, and achieves temporary market
power until Babcock and Brown copies and enters the market for listed infrastructure funds in
2004.
The paper begins with a description of the methodology used in research. The early sections of
the paper consider infrastructure as an asset class, the investment opportunity and the Australian
experience. The body of the paper considers the macroeconomics of infrastructure in Australia
and corporate entrepreneurs’ decisions in this climate. An appendix offers a broad business
overview of the asset packaging business.
Methodology
Analysis is conducted in two parts. Firstly, qualitative analysis examines the characteristics of
the infrastructure asset class (with a brief explanation of the asset business also included at
Appendix A). Second, quantitative analysis surveys the macroeconomic climate and how
individual variables collectively influence the inception of infrastructure funds and corporate
activity and affect their performance over a ten-year period. Primary analysis centres on the
period of December 1996 to December 2006, with secondary analysis examining
macroeconomic trends for the immediate earlier corresponding period prior to the inception of
the first infrastructure fund.
Quantitative research is orientated towards the analysis of the interaction between
macroeconomic variables including Australian Government 10 year bond yields, inflation,
interest rates, equity market movements, with company decisions including listed infrastructure
4

5. fund capital raisings and stock market listings and corporate activity by these funds and their
parent companies.
Observing the interaction of macroeconomic variables with corporate decisions in the period of
infrastructure fund innovation (and relative to the prior corresponding period) gives an insight
into the decision-making of entrepreneurs in a sequential multi-period setting. It is important to
examine the initial macroeconomic setting which facilitated the entrepreneurial opportunity, its
growth prospects and subsequent innovations.
Australia is selected as the case study as it is the market where the innovation occurred, now one
of the most mature markets for infrastructure investment in the world (alongside Canada and the
United Kingdom) and the global headquarters for the two most prominent investment firms
active in global infrastructure investment, Macquarie Bank and Babcock and Brown Limited.
The business environment has undergone significant changes since infrastructure privatisation in
the 1990s with the inception and operation of multiple infrastructure funds.
1. Infrastructure
The infrastructure fund
The infrastructure fund was a new-to-the-world product, an invention that created an entirely
new market of primary demand, leveraging firm strengths into a new activity centre in a
greenfields market. Typically, in greenfields market identification, firms look for emerging
trends and develop a fringe market through product and process innovation to orientate the
product to markets with the goal of market dominance and the objective of market leadership at
product inception. The innovator undertakes a first-to-market strategy of ‘leveraged creativity’ -
using the firm’s existing strengths and brainstorming creative applications to arrive at new
products. Future products which are developed are adaptive products – the firm takes its own
5

6. product and improves it in some way, with declining cumulative expenditures curve in product
development.
The asset class
Infrastructure is the fixed wealth of nations (Orr 2005). Infrastructure assets are the physical
structures and networks which provide the essential services required by societies and economies
to function. Infrastructure is divisible into two categories: economic and social infrastructure.
The unique attributes of various industry segments vary by their asset cash flow structures and
life cycles. Economic infrastructure includes user-pays services in sectors such as transport (toll
roads, bridges, tunnels, sea ports, airports, rail and ferries), energy and utilities (gas distribution
and storage, electricity distribution and generation, waste collection and processing, water
treatment and distribution, renewable energy), communications (satellite systems and cable
networks) and specialty sectors (car parks and storage facilities) (CFS 2006, RREEF 2005,
RREEF2006). It is estimated that 70% of Australia’s infrastructure is economic infrastructure
and 30% is social infrastructure (Senate). Social infrastructure includes state-pays services in
sectors such as healthcare (hospitals, aged care), education (schools), housing (affordable
housing) and judicial and correctional facilities (courts and prisons). Transactional activity in
economic infrastructure may occur by way of acquisition, trade sale, privatisation, development
and construction or joint venture. Transactional activity in social infrastructure generally occurs
through public private partnerships as Governments opt to retain control of core clinical and
social services in line with public policy (CFS 2006, RREEF 2005, RREEF2006).
The investment opportunity
In broad economic terms, infrastructure assets exhibit low volatility; possess cyclical immunity;
and hold monopoly, duopoly or oligopoly positions with sufficiently prohibitive barriers to entry,
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7. inelastic demand and non-rivalrous characteristics (Orr 2005, Peng 2007, RREEF 2007, CFS
2006). Attractive considerations include counter-cyclical demand strength and population
growth; captive customer bases; stable, predictable inflation-linked revenue streams with growth;
low operating risk and require low capital expenditure; low correlation of returns with other asset
classes; and investment lifecycles compatible with pension funds seeking long-term investments
to match their long duration liabilities. (Orr 2005, Peng 2007, RREEF 2007, CFS 2006).
Infrastructure investors seek stable earnings from essential goods and services, portfolio
diversification, investment in an asset class with low correlation to price fluctuations in other
asset classes and a tax effective income stream with tax deferred components (ASX 2006). These
characteristics are strongly appealing to institutional investors seeking conservative growth with
low investment risk. Pension funds in particular see the infrastructure asset class as a substitute
for long-duration fixed income (Orr, 2005). In 2006, $8 billion of infrastructure investment in
Australia accounted for approximately 2% of the country’s $900 billion in superannuation (Peng
2007). By 2012, infrastructure investment is expected to increase to $65 billion – 5% of total
superannuation fund assets (Peng, 2007 and Nielson, 2005).
The infrastructure asset class is susceptible to systematic risks, such as in (i) credit market
contractions which may cause reduced access to debt for infrastructure financiers/operators; and
(ii) increases in bond yields, where investors exit infrastructure assets for bond investments as
the risk premium increases under such scenarios. Non-systematic risk includes (i) interest rate
risk for asset/operational financing and refinancing; (ii) operational risk in adjacent businesses
subject to cyclicality (such as airline risk on airport revenues); and (iii) changes in regulatory
policy on regulated utilities (RREEF 2006, ASX 2006).
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8. 2. The Australian Infrastructure Market: a Case Study
Environmental Overview
In the 1990s in Australia changes occurred in the role of Governments in the provision of
infrastructure with trends shifting towards Government facilitating the private sector provision of
infrastructure by way of partnership (House of Representatives, 2003). The infrastructure
investment opportunity for private sector operators in Australia originated in (1) the privatisation
of Government trading entities in the 1990s, owing to microeconomic reform policy to use the
proceeds of asset sales to retire outstanding Government debt and to incentivise private
companies to operate these entities with higher service standards and competitive pricing for
end-users (CFS 2006); and (2) the entry into public private partnerships with private sector
consortia to engage private business efficiencies for the delivery of public infrastructure. The
scale of privatisation in Australia undertaken between 1990 and 1997 was second only in dollar
value to the United Kingdom (the most advanced market for privatization) in that period (RBA,
1997).
Profitable investment opportunities in the mature Australian infrastructure market have existed
since the privatisation period. The UBS Australia Infrastructure Index (a sub-index of the
S&P/UBS Infrastructure and Utilities Index, the benchmark industry index) reports returns of
20.2% (annualised returns) over ten years, 30.2% over five years, 28.4% over three years and
32.2% over one year for Australian infrastructure versus returns for UBS Global Infrastructure of
13.8% over ten years, 29.5% over five years, 29.5% over three years and 26.7% over one year.
The transition to investable assets
Infrastructure’s supply-side problem emanated from the fiscal constraints on Government which
had led to underinvestment in infrastructure maintenance, renewal and development, persisting
8

9. against unsatiated end-user demand for essential services. The origin of infrastructure as a
distinct asset class transpired from opportunistic private sector financiers and infrastructure
operators exploiting this supply/demand imbalance through structural innovations of the
infrastructure fund and through the placement of cash inflows from superannuation funds
seeking stable, long-yielding investment opportunities.
Supply of investment opportunities for financiers and their co-investors is dependent on
Governments’ willingness to privatise assets and to enter into Public Private Partnerships (Orr
2007, RREEF 2006, ASX 2006). Presently, the domestic market for infrastructure investments
has reached a level of maturity where demand now outstrips supply for infrastructure assets.
Infrastructure funds
The infrastructure funds analysed in this paper are indicative of infrastructure funds commonly
operating in Australia with global investment mandates. Macquarie Infrastructure Group (MIG)
develops and manages toll roads around the world. Macquarie Airports (MAp) is one of the
world’s largest private airport owner-operators. Babcock and Brown Infrastructure (BBI)
acquires and manages diversified infrastructure assets globally, across three asset sub classes:
energy distribution and transmission, transport infrastructure and power generation. Babcock and
Brown Wind Partners (BBW) is a globally diversified listed stapled entity investing in wind
energy generation assets. Macquarie Bank Limited is a diversified full-service investment bank,
whilst Babcock and Brown Limited is a specialised infrastructure and real estate asset manager.
3. The macroeconomic drivers of infrastructure funds in Australia
Overview
The interaction of macroeconomic variables has a significant influence on the formation of
entrepreneurship opportunities. Fundamental macroeconomic trends have influenced
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10. infrastructure’s emergence as an asset class, its exploitation through asset packaging and
financial product development and investors’ financial commitments to the asset class. It is the
author’s hypothesis that the domestic Australian macroeconomic environment was a catalyst in
the inception of the first infrastructure fund and continued to be of considerable importance to
these domestically-headquartered and globally-active funds in corporate activity undertaken
throughout the sample period.
At the inception of the first infrastructure fund in Australia, declines in interest rates to a
historically low cost of debt and corresponding decline in bond yields, coupled with low inflation
and rising equity market movements enabled opportunities in listed infrastructure fund creation
and corporate activity for the ensuing ten year period. As interest rates and long-yield bonds held
steady over this period, Australian investors’ (particularly superannuation funds) appetite for an
asset class offering similar stability to bonds (for a risk premium) shifted interest to the equity
markets, with infrastructure fund investment opportunities providing greater upside for relatively
similar risk.
As the infrastructure asset class has matured and become accepted in Australia, its sensitivity to
macroeconomic factors has also held. Investment in listed infrastructure funds is heavily
influenced by inflation rises and bond yields (UBS, 2006) and equity market momentum which
allows for heightened deal activity, a strong market for primary and secondary capital raisings,
listed vehicle market capitalisation growth and lower fee structure scrutiny (Merrill Lynch,
2006).
Data Sources and Analysis
Analysis is conducted using Australian macroeconomic data for December 1996 to December
2006 (the sample period). The chronological logic for this sample period is that Macquarie Bank
10

11. lists its first infrastructure fund, Macquarie Infrastructure Group, on the Australian Stock
Exchange in December 1996, with ten years providing a logical sample period for organic and
bolt-on growth and the entry of and Babcock and Brown as a competitor in the infrastructure
fund market in October 2005.
Data sources include inflation and interest rates from The Reserve Bank of Australia (RBA);
superannuation statistics from the Australian Bureau of Statistics (ABS) and Australian
Prudential Regulatory Authority (APRA); share prices and associated information from the
Australian Stock Exchange (ASX); and indices from UBS Australia.
Pre-Macquarie Infrastructure Group listing - the immediate prior corresponding period from
January 1990 to December 2006
Based on what would be in future treated as the macroeconomic drivers of the infrastructure
asset class, December 1996 was an opportune time for a macroeconomic-interpretive
entrepreneur to list the first infrastructure fund on the ASX. As Australia came out of recession
in the 1990s, RBA monetary policy decisions to cut interest rates led to a decline of interest rates
from 17.5% in January 1990 to 6.5% in December 1994, the point at which Macquarie
Infrastructure Group listed on the ASX (Figure 1.1). During this same period, 10-year Australian
Government bond yields decreased from 12.8% in January of 1990 to 7.7% in December 1996
(Figure 1.1) as a result of asset privatisations (all classes) being used to retire debt (RBA). The
RBA consumer price inflation rate (all groups) decreased from 8.6 points in March 1990 to 1.5
points in December 1996 (Figure 1.2). Against this economic picture of low interest rates, lower
bond yields and low inflation, the S&P/ASX200 Total Return Index increased from 6,304 points
in January 1990 to 9,858.9 points in December 1996.
11

12. The activities and performance of the selected infrastructure funds and their parent companies
from the sample period based on the corresponding macroeconomic climate
If the infrastructure funds business is as reliant on macroeconomic factors as suggested and
corporate directors are interpretative of domestic macroeconomic indicators in decision-making,
there should be some logical correlation between company decisions and macroeconomic
movements. Decisions made by Macquarie Bank Limited and two of its infrastructure funds,
Macquarie Infrastructure Group and Macquarie Airports were examined for the period of
December 1996 to December 2006; and by Babcock and Brown Limited and two of its
infrastructure funds, Babcock and Brown Infrastructure and Babcock for the period of July 2005
to December 1996 and Brown Wind Partners for the period of September 2004 to December
2006.
The most significant macroeconomic movements over the sample period include 10-year
Government bond yield dropping from a high for the period of 7.37% in December 1996 to a low
for the period of 5.1% in December 1998; interest rates declining from 6% in December 1996 to
then reach a high for the period of 6.25% in August 2000, with a decline to 4.25% by December
2001, to close out the period again on a high of 6.25%; inflation remaining relatively constant
save for a high of approximately 6% from September 2000 to June 2001; and the S&P/ASX200
Total Return Index showing sustained equity market momentum, ascending from 10,000 points
at December 1996 to reach 35,000 points at December 2006.
Corporate announcements show that the parent companies for infrastructure funds, Macquarie
Bank Limited and Babcock and Brown Limited elect to undertake capital structure changes,
capital raisings and infrastructure fund raisings between mid-to-late-2000 to late-2001, where in
the macroeconomic climate there is a marked decrease in interest rates from 6.25% in August
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13. 2000 to 4.25% in December 2001, a marked decrease in inflation from 6.1% in September 2000
to 2.5% in September 2001 and a decrease in bond yields from 6.28% in August 2000 to 5.21%
in October 2001 (with some volatility in yields in between). During this period MBL completes
the fund raising for Macquarie Airports Group (the unlisted predecessor to MAp) and undertakes
a parent company capital raising; whilst MIG undertakes a change in capital structure (adding a
Bermuda-based third arm to its staple security), makes two significant acquisitions and
completes a large placement.
The most significant period for corporate activity within the sample space occurs between
November 2003 and May 2006, where in a period of constant low inflation, interest rates and 10-
year bond yields both hover between 5% and 6%. Corresponding to this, the S&P/ASX200 Total
Return Index rises from 17,126 points in November 2003 to 29,776 points in May 2006, the
fastest growing period for the sample. In this period, there is substantial domestic infrastructure
fund activity from MBL (one new infrastructure fund raising); MIG (two major asset
refinancings, a large placement and asset demerger); and MAp (two placements and the
acquisition of Sydney airport). At this time BNB enters the market (raising capital for 4 new
infrastructure funds); with the backdoor listing of BBI (formerly Prime Infrastructure,
conducting two domestic acquisitions and a capital raising); and the listing of BBW (acquiring
three domestic wind farms and conducting a capital raising). There is also extensive international
activity, from all parties, however, this is not analysed given that international macroeconomic
factors also impact corporate decision-making in this capacity.
The most constant period for all key macroeconomic indicators for the period is from October
2002 to August 2003, where a significant number of world events occur, including the Bali
bombing in October 2002, the SARS outbreak in February 2003, the Iraq war Feb 2003 and the
13

14. Jakarta bombing in August 2003. During this period, Macquarie Bank undertakes several large
domestic transactions, including the sell down of significant interests in both MIG and MAp and
the completion of an infrastructure fund IPO.
The broad performance of listed infrastructure in the sample period
Expanding the start of the sample space to the commencement of the 1997 financial year in July
2006 to the end of the 2006 financial year in July 2006 (Australian financial years are dissimilar
to calendar years), it is notable that the number of listed infrastructure entities grew from four in
July 1996 to 20 in June 2006 with market capitalisation growing from below $1 billion in July
1996 to in excess of $20 billion in June 2006 (Colonial, 2006). Over this period, listed
infrastructure funds show a higher correlation with 10-year Australian Government bond yields
than unlisted infrastructure funds, with the former exhibiting an R2 measure of 0.46 and a higher
correlation of -0.68 and the latter an R2of 0.08 and a lower correlation of -0.28 (Colonial, 2006).
Colonial explains the negative correlation as being a result of the long-term bond rate being
typically imbedded in the discount rate used to value infrastructure businesses, where holding all
else constant, if the bond rate rises, the discount rate applied to valuing the businesses will fall
and the resulting net present value (NPV) of the businesses will fall as a consequence.
Using a correlation matrix for Australian asset classes for the sample period (rolling annual
nominal total returns on monthly resets) show that listed infrastructure (using the UBS
Infrastructure and Utilities index as a proxy) has a strong positive correlation of 0.23 to equities,
0.33 to REITs and 0.50 to bonds (Colonial, 2006).
At a risk-free rate of 5.9%, listed infrastructure for the sample period exhibits a Sharpe Ratio of
1.5 (a measure of a reward-variability ratio), on par with other major asset classes including
equities, REITs and direct property. At a 0% risk-free rate, listed infrastructure for the sample
14

15. period exhibits a lower Sharpe Ratio of 1.1, substantially higher than equities, but only slightly
higher than REITs and direct property (Colonial).
Superannuation
Corresponding to the trend toward infrastructure investment over this period, superannuation
fund managers’ allocation to the asset class played an important part as superannuation earnings
during this period became and increasing important part of Australia’s income mix, with
superannuation assets as a proportion of GDP growing from 37.9% in June 1996 to 98.8% in
June 2006, based broadly on public policy outcomes from a Government-mandated compulsory
superannuation contribution of 9% of employees’ salaries. In the ten years from June 1996 to
June 2006, Australian superannuation assets nearly quadrupled from $245 billion to $912 billion
(APRA, 2007) with an industry average rate of asset growth of 14 per cent (based on improved
contributions and increased investment earnings), representing strong real growth in a period of
low inflation.
It is difficult to estimate the amount of superannuation contributions to the infrastructure asset
class and infrastructure funds in particular over this period. Estimates of infrastructure
investment by superannuation funds were estimated at 2 per cent of total fund assets in 2002 at
$8 billion, with projections that by 2012, $65 billion or about 5 per cent of projected
superannuation assets would be invested in infrastructure (Nielson, 2003). Nielson notes
conjecture regarding other lower estimates of $5 to $6 billion investment for that period and
doubts surrounding accuracy given uncertainty surrounding fund reporting methods, investment
classifications and fund structures. The industry fund sector provides the best overall information
on levels of investment in infrastructure. During 2003 the average proportion of an industry
fund’s portfolio invested in infrastructure equity was about 4.3 per cent.
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16. Discussion and Conclusion
It is evident that there is a significant correlation between the interaction of corporate-decision
making and domestic macroeconomic variables in the infrastructure fund space in Australia
within this period. The inception of the first infrastructure fund was a new product development
in response to demand facilitated by changes in market structure and a facilitative
macroeconomic climate. Corporate decisions made in the ten ensuing years appear to be related
to when bond yields, interest rates and inflation.
Beyond the scope of preliminary analysis undertaken in this paper, stronger empirical evidence is
required to determine the extent of correlations, including triangulation and regression analysis.
Further studies may also elect to undertake more extensive financial analysis, to study fee
structures and why infrastructure funds appear to underperform relative to their sponsors. Other
studies may possibly choose to examine the valuation of infrastructure funds by their assets and
fee structures using the proprietary-developed Morgan Stanley Dividend Discount Model (also
adopted by UBS) which separates asset values (aligned with domestic 10-year Government bond
yields and sovereign risk premiums in assets’ countries of origin) from management fees. Other
studies may choose to use a Bass model to consider the invention/innovation/diffusion process
present in this industry, market and period.
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17. Appendix A: Infrastructure funds – a business overview
Financial Sponsors
At the company level, infrastructure funds are operated by two types of firms: financial sponsors
and industry players, the latter of which whose infrastructure funds generally house their
company assets for transparent valuations, with funds being managed by a parent entity.
Infrastructure funds may be listed or unlisted vehicles. Listed infrastructure funds can provide
the upside of greater liquidity and performance benchmarking and the downside of a lower risk-
adjusted return, given significantly higher volatility, and a higher correlation with public
equities. Unlisted infrastructure can offer a higher, risk-adjusted return due to lower volatility
and low correlation with equity and bond markets, with the downside of illiquidity and
potentially longer-term cash flow realization. Comparable to industry funds, the 72 financial
sponsor-managed funds raised in the fifteen months to July 2007 have raised US$120 billion and
have significantly greater buying power than listed infrastructure funds operated by industry
players estimated to have only $40 billion to invest in infrastructure (Orr, 2005).
Fund platforms
Typically, a financial sponsor operating an infrastructure fund will manage a portfolio of
infrastructure funds. Sponsors managing an infrastructure fund platform draw on parent company
human and capital resources and relationships to source and acquire attractive infrastructure
assets from willing vendors at or below implied fair values; to structure these transactions
effectively from financial, legal and tax perspectives; and the operational capabilities to manage
these infrastructure assets so as to deliver value for investors. The business model is based on an
asset manager (or an investment bank with asset management capabilities) raising public capital
through discrete listed or unlisted infrastructure fund vehicles to finance the acquisition of
17

18. infrastructure assets by way of private equity-style investment with public finances. The sponsor
then uses its resources and capabilities (or those of one of its divisional business units) to manage
the ongoing operation of its infrastructure funds in exchange for trailing management and
performance fees.
Corporate Entrepreneurship
As a study in corporate entrepreneurship, the business model’s innovation lies in securitising
assets in an illiquid sector which are inimitable, scarce and non-substitutable and selling units to
conservative, growth-seeking institutional and retail investors seeking to make liquid
investments in an illiquid asset class (separating ownership and control).
The entrepreneur’s innovation in process is achieved by deploying the firm’s human and capital
resources and its capabilities in financial engineering and asset management as a competitive
advantage in asset packaging. Sponsors earn Schumpterian (entrepreneurial) rents on their
structural innovations in packaging infrastructure assets which generate Ricardian (scarcity)
rents. Investors earn capital growth and income from their investment in funds. The business
model is based on intangibles including ideas, product creation, technologies, services and
advanced market understanding. Competitive advantage lies in complex intellectual property
vested in people and management processes, which is both difficult to imitate and easy for
successful sponsors to replicate geographically into new markets.
The model relies on securitising the principal’s operating assets, separating management from
ownership and retaining control, raising external capital to fuel growth and maximising
transactional participation opportunities. The model operates under the concept that a sponsor
does not need to own its operating assets (only the management rights to them) as they are an
impediment on the parent company’s balance sheet to fast growth, being better dispersed across
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19. a large institutional and retail shareholder base who can earn cumulative growth on these assets’
appreciation in value and the dividends payable from their growing cash flows. A sponsor needs
only to own the management interests to these assets for which in exchange for ongoing
management and outperformance fees it provides its company’s management expertise in their
finance, operation, management and maintenance. The sponsor, using its proprietary resources,
can maximize profit for itself through appreciations in asset ownership, transaction advisory fees
and ongoing management/advisory fees from managed funds and for investors through their
participation as asset owners in managed funds, receiving dividends and capital gains.
At a transactional level, sponsors typically earn upfront underwriting fees from launching the
infrastructure fund from their own balance sheet onto the equity markets; and advisory fees for
utilising their financial advisory resources (providing mergers and acquisitions advice, deal
structuring and financial arrangements). In return for delivering value for investors under this
model, sponsors earn base management fees, linked to equity under management (EUM) or
assets under management (AUM) (generally uncapped, offering unlimited upside) and
performance fees when the fund outperforms its prescribed benchmark, which are assessed on a
particular date (again, uncapped).
Transaction Structures
A typical transaction may occur by way of the following process. Firstly, the principal uses its
deal-making capability to source appropriate infrastructure asset/s to acquire (typically with
stable cash flows and generally with monopoly positions or favourable long-term contracts). The
principal then acts as its own investment banker, employing its corporate advisory and financial
engineering skills to structure and execute the transaction. Financial completion is achieved by
drawing down on finances typically from the principal’s balance sheet (and sometimes that of its
19

20. co-investors) and raising a large debt component. The principal then, acting as sponsor, transfers
the asset/s on to its most appropriate infrastructure fund by way of a related-party transaction,
booking transactional advisory and underwriting fees. The principal integrates the asset/s into its
portfolio and manages the asset/s on behalf of the fund, receiving base management fees (annuity
income streams) and performance-based management fees thereafter. If an appropriate vehicle
does not exist, a separate transaction may take place whereby the principal lists a fund (often
with a sector-specific mandate) with a collection of seed assets from its parent balance sheet.
Across the spectrum, the principal acts as a financial adviser, underwriter, broker, fund and asset
manager and principal. As the prominent example, Macquarie Bank leverages opportunities
across IBG for maximum value. For governance purposes, ISF separates its Infrastructure Funds
business from Macquarie Advisory. The Infrastructure Funds business focuses on active asset
management, investment evaluation, capital management, legal and compliance, tax and
accounting, investor and media relations. Macquarie Advisory focuses on sourcing investments
and deal execution.
Vehicles and fund structures are similar in principal to private equity investment in that they are
structured to generally make diverse investments in the sectors within their asset class and to
mobile capital quickly to take advantage of potential deals. The comparative distinctions
between private equity funds and infrastructure funds are that: (i) infrastructure sponsors possess
more diversified infrastructure asset portfolios, whereas private equity sponsors typically possess
mode diversified sector portfolios overall; (ii) infrastructure funds (and their investors) have
long-term investment approaches and more conservative equity hurdle rates, whereas private
equity funds operate under a shorter-term acquire/restructure/exit approach; (iii) sponsor party
profits in infrastructure funds lie in a fee-generating holding strategy based on asset
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21. appreciation, management and outperformance fees, whereas private equity firm profits lie are
achieved by profits at terminal divestment; and (iv) infrastructure asset vendors are typically
Government parties divesting assets which provide essential services to society and if such assets
are regulated, prefer to transfer assets to long-term orientated counterparties.
21

22. Works Cited
‘APRA Insight (2007): Celebrating 10 Years of superannuation data collection 1996 to 2006’. Retrieved
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