RiskMetrics Group has just published a new report, Infrastructure Funds: Managing, Financing and Accounting. Infrastructure as an asset class has commanded increasing attention from investors and the financial press over the last few years. Major asset sales in the UK - most notably of ports and water utilities such as Thames Water - and ongoing attention on road infrastructure in the United States and Europe, has been met with increased competition for assets, not from 'trade buyers' (such as utility companies) but from investment banks and asset managers. The asset manager model for infrastructure, where a sponsoring manager - usually but not always an investment bank - acquires assets and then on-sells them into a separate fund or publicly traded entity but retains management rights - was pioneered in Australia.

Even as the managed infrastructure model has grown in popularity, at least among potential and actual asset managers, there are some signs of investor unease with the existing model. At the basis of these concerns is the unique governance structure that has emerged among publicly traded infrastructure vehicles.

This report initially outlines the main features of infrastructure assets. It then explains the importance of distinguishing between infrastructure assets and infrastructure funds. The predictable, and steadily growing, cash flow associated with infrastructure assets is commonly highlighted as a basis for providing an attractive, and steady, yield. However, the yield delivered by several infrastructure funds is sourced from operating cash flows of the fund's assets and from capital.

The paper summarizes the key features of the infrastructure fund model and highlights a range of investment-related concerns with the model. The paper then describes a series of governance concerns with the infrastructure model. For instance, the existence of 'special shares' in some funds which entitle the external manager to appoint a majority of the fund's directors. The paper concludes with a series of reform proposals.

To read the report, please visit here.