Morgan Stanley Infrastructure flags LP concerns

The Asia-Pacific head of the business, Mark McLean, spoke to AsianInvestor about its investment strategy and what limited partners are worried about these days.
Morgan Stanley Infrastructure flags LP concerns

Mark McLean joined Morgan Stanley Infrastructure as head of Asia Pacific in mid-2013 and is one of six senior partners in the business. 

The firm’s second fund, North Haven Infrastructure Partners (NHIP) II, closed in February with $3.6 billion in assets, with another $2.2 billion allocated for a separate co-investment pool. The first close took place in June 2014. The latest strategy invests only in OECD countries, which in Asia means Australia, New Zealand, Japan and South Korea.

In Fund I, Asia-Pacific investors represented 21% of the fund, while in Fund II Asia-Pacific investors represent 37%, mostly from China, as reported.

MSI invests in ‘core-plus’ infrastructure, meaning it buys assets where valued can be added through active management. Core-plus assets typically deliver an internal rate of return in the low- to mid-teens.

The full interview with McLean appears in the June issue of AsianInvestor magazine.

Q AsianInvestor: What’s your typical ticket size?

A Mark McLean: We would typically look to make 10 to 12 investments over the course of the fund, so we would look to invest $300 million or more per deal. We have looked at a number of deals where the fund and its co-investors would invest north of $1 billion.

Q What is your typical strategy when it comes to exiting assets?

A Typically we buy assets that are core [a well-established existing asset that doesn’t need any improvement] or core-plus and then sell them into the core market. This is a strategy that’s worked very well in the past few years, because there’s a large weight of money that’s looking for core infrastructure.

Q How long does it take for you to deploy a fund’s assets?

A We have a five-year investment period for the current fund and hope to be finished comfortably before that, depending on market conditions. We would love to invest quickly and well, but we would rather invest well than quickly.

Q How do you respond to client concerns that big funds will pay a premium for larger deals to be sure to get capital deployed?

A I don’t think it’s true that funds will always pay a premium for bigger deals. We are certainly very disciplined in the way we deploy our capital. If you raise a big fund, you’ve got to maintain investment discipline.

Q What other particular concerns do you hear from LPs?

A The main concern we hear in the current environment is that assets are expensive. That’s a consequence of low interest rates, and of investors with a low cost of capital having discovered the infrastructure space and then beginning to compete aggressively for assets. That reinforces the need to ensure we are buying well and not just joining a stampede towards paying the highest price possible in an auction process.

Q Can you provide an example of any Asian assets that your latest fund has invested in?

A We haven’t done an investment in Asia for fund II yet – that’s my job, and I’m spending a lot of time to make sure that we get something done in the Asia-Pacific region.

Q Do you look at infrastructure debt as well as equity?

A We can, but we don’t see the returns there at the moment, so to reach our target rate of return we will focus on equity.

Q Have you focused on operational improvement recently?

A No question. We ensure our deal team stays focused on their deals, and we have a dedicated acquisitions team. We believe a situation where people do deals and throw them over the fence to an asset management team can cause ill-disciplined processes. 

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