GPs’ track records top diligence concerns …

... while more than half of investors in infrastructure avoid first-time funds.

Asterion Industrial Partners, a firm created by a trio of former KKR executives, raced to a €901 million close for its maiden infrastructure fund in 2019, surpassing its €850 million target in less than a year.

The firm’s debut is understood to be one of the biggest first-time infrastructure vehicles ever raised in Europe, second only to Cube Infrastructure Managers’ €1.08 billion inaugural fund, which closed in 2010.

But Asterion, which will invest in mid-cap telecoms, energy and utilities, and mobility opportunities, defied a challenging market for new managers.

Some 40 percent of investors in infrastructure funds are planning to increase their total number of GP relationships over the next 12 months.

However, more than half – 54 percent – do not plan to invest in any first-time infrastructure funds. This is significantly higher than the level in more mature asset classes, such as private equity.

There are some in the industry who believe that performance from new entrants has lacked consistency. Not all share that view, as 5 percent of investors do have a defined allocation for first-time infrastructure and 30 percent intend to back first-time managers opportunistically.

“The proliferation of new entrants in the asset class has led to a plethora of hyper-focused regional and sector funds with mixed success stories,” says Vittorio Lacagnina, head of business development, private infrastructure, at Partners Group.

“In some instances, a confirmation bias sets in, leading to a decoupling between asset pricing and return fundamentals.”

Selling a stake

Investors remain unconvinced about the merits of selling a stake to an outside investor – 45 percent believe such a move makes the GP a less attractive proposition, while 43 percent are unsure.

The sale of minority stakes has become increasingly common across the alternative asset classes. The emergence of specialist buyers, including Dyal Capital Partners, Blackstone’s Strategic Capital Holdings, Goldman Sachs’ Petershill fund and AlpInvest, illustrates the trend. These fund of firms groups have raised more than $17 billion since 2012 to pursue the GP stakes opportunity and are currently looking to raise $14 billion more.

Managing generational change has been one of the most significant drivers of GP stake sales. The more mature private equity and hedge fund industries have, therefore, inevitably led the charge. Blackstone’s acquisition of a $500 million stake in BC Partners has been one of the latest transactions to complete. However, infrastructure typically tracks these longer-standing asset classes, and similar deals are likely to be struck in the space.

In addition to providing a solution for succession, the sale of a stake in the general partnership can fund acquisitions or expansion into new territories and subsectors of asset classes. They can also finance recruitment or internal investment in areas such as technology. For the buyer and the underlying investors in these specialist funds, the acquisition of a GP stake provides participation in a firm’s cashflows, not just the returns from an individual fund.

The income stream from management fees and carried interest can be both steady and substantial, particularly as a firm expands its assets under management. It can also result in preferred allocations in a firm’s primary fund, as well as opportunities for co-investment.

Deal breakers

With the exception of performance track record, team size and investment capacity are seen as the most important areas of focus when considering an alternative assets fund investment. Some 88 percent of investors say these two factors play a major part in their due diligence. Terms and fees, a fund structural review and succession are the next three most important features of due diligence. However, only 23 percent of investors in alternative assets say that diversity and inclusion play a major part in due diligence and 22 percent say these factors play no part at all.

Furthermore, only 31 percent say environmental, social and governance credentials are key, and 19 percent do not review ESG policy and practice as part of their investment decision-making.

Almost half of investors in infrastructure funds are confident that their GPs are structuring deals sensibly to withstand a potential downturn. However, 15 percent of investors say they are lacking confidence, with the remainder describing themselves as neutral.