Infrastructure firms bundle the investments or securitize their income and sell it to investors. This gives managers a new source of income and a pay day for their infrastructure investments.Infrastructure fund managers have been raising money at a fast clip this year: $18 billion in the first six months, up from $10.8 billion raised in the first half of 2006, according to the publications Infrastructure Journal and Private Equity Intelligence.

Alinda Capital Partners LLC, New York — a new player in infrastructure — closed a $3 billion fund in July, after announcing a $1 billion target at the opening last year. The Macquarie Group, New York, in May closed two funds with $10 billion in combined commitments. Even with that whopping amount of cash, Macquarie is expected to return to the market next year.

Also in May, Citi Alternative Investments, New York, formed a new infrastructure group, Citi Infrastructure Investors, which is currently raising a $3 billion fund to invest in infrastructure projects in Europe and North America, according to sources familiar with the fund.

Already, Macquarie Group’s Macquarie Infrastructure Co., a $1.6 billion partnership listed on the New York Stock Exchange, securitizes the cash flow from a number of U.S.-based infrastructure investments, including an airport services business, an airport parking business, a business-district energy provider and a natural gas production and distribution business.

Listed infrastructure securities could become a separate asset class for institutional investors, not unlike the $700 billion real estate investment trust and $1 trillion traded real estate debt markets, said Shaun Mays, chief executive officer-infrastructure investments for RREEF Alternative Investments, New York.

In addition to publicly traded bundled infrastructure securities, this class of investment could include existing infrastructure public companies. These global firms are infrastructure specialists that own and operate such projects as toll roads and harbors, Mr. Mays said.

Dramatic

The growth trajectory could be as dramatic as it was for REITs, which grew from $40 billion concentrated in the U.S. in 1990 to a $700 billion global market in 2006, noted Mike Underhill, president and CEO of Capital Innovations LLC., a consulting and advisory firm. He cited National Association of Real Estate Investment Trust data.

There is also room for a securitized infrastructure debt market, similar to the publicly traded real estate property debt; that grew to $1 trillion in 2006 from $100 billion in 1990, Mr. Underhill said.

“There is a huge potential for an infrastructure equity markets to evolve like real estate and institutionalize the asset class,” Mr. Underhill said.

Enormous population growth worldwide is creating insatiable demand, he said. Tax cuts and low interest rates in recent years have helped create a financing shortfall on the order of $1.6 trillion in the U.S. alone, Mr. Underhill said, quoting data from Dow Jones Private Equity Analyst. Governments are hard-pressed to finance these projects through the typical method of issuing municipal bonds. State laws and regulatory changes are spurring private investment in public works. The number of privately financed infrastructure projects doubled to $30 billion in 2006 from 2005, according to Infrastructure Journal and RREEF Alternative Investments. In the first five months of this year, about $8 billion of U.S. infrastructure projects were in the pipeline. Initial industry estimates are that more than $37 billion in infrastructure funds are being raised this year, Mr. Underhill said based on his firm’s research.

2 approaches

Currently, two investment approaches are being offered to institutional investors. One is a private equity method in which infrastructure managers buy a project or company, restructure it and then sell or securitize the cash flow, Mr. Mays said. The second is to invest in mature infrastructure projects with stable cash flows.

Private equity-type infrastructure sometimes create publicly traded vehicles as a way of “exiting” or earning a return on their investments, said Robert Graffam, senior managing director for Europe at Darby Overseas Investments, a Washington-based subsidiary of Franklin Resources Inc. Investment managers also securitize projects like wind power plants as part of a financial instrument, he said. Or they could sell the plant to an operating company or another financial investor like a private equity or infrastructure manager, he said.

Many managers that have taken the private equity approach such as Macquarie, New York-based Goldman Sachs & Co., Alinda and the Carlyle Group, Washington, have created closed-end vehicles. These funds mirror the structure of private equity and real estate funds in that they have limited lives with carried interest-type management fees included, said James McCarvill, partner with C.P. Eaton Partners LLC, a Rowayton, Conn., placement agent.

But many of the closed end funds come with a twist.

A few of the closed-end vehicles have options to extend their lives for a short period like five years through a vote by the limited partners. And JPMorgan Asset Management, New York, created an open-end vehicle that has no incentive or carry fee included.

The other approach is to invest in mature projects. Some managers, like RREEF, are pulling the investments together into funds, offering them to pension funds and insurance companies looking for a long-term investment to hedge against pension liabilities and annuities, Mr. Mays said. RREEF has purchased projects from private equity players, he added.

RREEF has an open-end fund to accommodate its long-term, lower returning strategy; it includes an incentive fee.

Either way, infrastructure deals tend to be highly structured projects that contain current income and debt financings, both of which can be securitized and sold, Mr. McCarvill said.