Curious minds (weekly)

As limited partners seek to invest more capital in infrastructure, they’re growing ever more inquisitive about its past performance and promised future.

If fund managers were looking for a bit of Christmas cheer – at times of tougher competition for assets – they would likely find it in our latest Limited Partners (LP) Perspectives Survey.

Over the last few months, we polled more than 80 senior investment professionals, from a wide range of institutional investors, to establish how they plan to engage with the asset class. The results were very encouraging: not only did 42 percent say they intended to increase their target allocation to infrastructure in the coming year, but 65 percent thought they would make at least two new fund commitments over the period. Close to a quarter even said they planned to pledge money to four vehicles or more.

With infrastructure now in the limelight in developing and developed markets alike – creating hope for a fresh wave of privatisations and greenfield projects – it looks like General Partners (GPs) could soon be living happily ever after on both the deal and fundraising fronts. But the story, we found, is more nuanced than any Christmas tale.

For a start, how much certainty there is that politicians and regulators will stick to their promises remains a matter of great debate among LPs. Regulatory risk ranked first among the macro issues worrying investors, with tax and industry regulation and political sentiment also garnering a fair share of votes. Tellingly, however, the second most popular choice was the high level of competition for assets, followed by investor disillusion with performance/strategic drift. Clearly LPs’ minds are not quite so much at peace as the headline figures suggest.

Yet more striking is investors’ willingness to become masters of their destiny: understanding and influencing the drivers of returns, embracing more active risk management strategies and establishing reliable performance metrics and benchmarks topped our portfolio management issues list, while being able to recruit and retain good people, as well as do co-investments and direct investments, were the main priorities when it came to investment strategy.

But the focus was also starkly on the GPs themselves. If there were ever any doubt, it’s now become clear that LPs are no longer willing to write blank cheques: a majority of them won’t sign up unless managers are able to generate a repeatable track record, with many investors also placing much importance on team stability, the presence of a proven operating model and strategy consistency. All this comes at a price, of course. But here again, LPs seem to be getting confident enough to negotiate terms: a good number of them told us they see the current level of management fees as being a concern.

So it might just be that, as investors grow increasingly curious about infrastructure, they nurture rising expectations of what it can achieve. In that context, are they happy about how the asset class has fared so far? Hard to say, if only because LPs use rather different metrics to measure performance. By and large it looks like they are more optimistic about recent vintages (post-2006) than earlier ones (pre-2000).

Finding an answer to this latter question may become easier as the industry matures. Last week, for instance, MSCI subsidiary IPD launched an ambitious global unlisted infrastructure index which, as more firms contribute to its database, could help forge a more objective understanding of how the asset class behaves. In the meantime, however, one thing is clear: notwithstanding infrastructure’s growing profile as an asset class, managers now have to work harder to attract and keep their investors.