Navigating Private Equity Fund Limitations for Energy Infrastructure-Focused Investments -

Energy infrastructure funds have emerged as a class of funds that offer investors the potential for long-term stable returns, as well as downside protection through the asset class’s inflation-hedging characteristics. An energy infrastructure fund’s value drivers are different from the conventional buyout-focused fund, and this has led some energy infrastructure fund sponsors to seek flexibility around conventional fund covenants relating to concentration risk and the fund’s term that can impact investments in unexpected ways. This article provides a brief introduction to energy infrastructure funds and uses examples to illustrate how conventional private equity fund limitations can impact an energy infrastructure investment. It also provides practical suggestions for reducing those impacts through flexible fund agreements that align investor goals with the fund’s asset development and hold strategy.

Defining Energy Infrastructure and the Return Profile -

Many institutional investors seek exposure to the energy sector through two different, and sometimes overlapping types of funds: (i) natural resources funds, which traditionally invest in companies that develop and produce oil and gas or other minerals and target returns (net of management fees and carried interest) of approximately 15-25% and (ii) infrastructure funds, which generally develop and/or own real assets expected to generate stable, long-term cash flows and target returns for investors ranging from approximately 10-15%. Numerous funds are hybrids of these two classes, and their targeted returns may reflect a blend of the two comparable return targets.