Returns and Persistence of Private Equity Infrastructure Funds

Abstract

About 10% of all infrastructure finance in the post-GFC era has been channelled into the asset class via Private Equity Infrastructure Funds (PEIFs). In spite of the marked expansion in PEIFs, and their increased utilisation within the mainstream institutional investment community, there is a dearth of academic research on the performance characteristics of the unlisted infrastructure funds universe. There is only limited understanding of PE returns and capital inflows and outflows. This paper uses individual funds’ cash flow data from Preqin to construct three measures of performance – the internal rate of return (IRR), the ratio of total value – cash realisations plus remaining net asset value (NAV) – to paid in capital (TVPI) and the public market equivalent (PME). Findings suggest that investors should exercise caution in their interpretation of ‘reported’ fund performance particularly when an existing fund is reporting results whilst a ‘legacy fund’ is capital raising. However, we do find that returns persist across follow-on funds within the same firm. Pertinently, our analysis shows that the degrees of explanatory power are greater for second previous funds than for immediate predecessor funds. Our results also show IRR to be a very weak performance indicator within the PEIF universe due in part to the sensitivities in cash flow timings (or reported timings) and the impact of NAV inflation of IRR. Using PME increases predictability significantly and affords a much more robust performance indicator in instances where funds have not fully liquidated. Pertinently, the fund size was not identified as a key determinant of fund performance based upon our cash flow data sample although subsector focus and the domicile of the GP partner were deemed to have a statistically significant impact upon fund performance.