In a hot market, LPs want greater GP alignment, survey finds

A demand for larger GP commitments and carry waterfalls surfaces alongside a fear of too much new money entering the market, Probitas Partners reports.

LPs are showing an increasing concern about the level of GP commitments to infrastructure funds, a survey by placement agent Probitas Partners has found.

The survey of 36 infrastructure investors – predominantly in North America and Europe – found that 52 percent of LPs are most focused on the level of GPs’ financial commitment to funds, while 55 percent were focused on carry distribution waterfalls. LPs were asked to select no more than three focus areas.

The consideration of these issues significantly increased from the 33 percent of investors who highlighted these as focus areas in 2019, the last time Probitas carried out such a survey. The focus on overall level of management fees also remained high, although the 52 percent who highlighted this remained broadly unchanged from 50 percent in 2019.

“Those two terms are heavily focused on alignment of interest between GPs and LPs,” Kelly DePonte, managing director at Probitas, told Infrastructure Investor. “With so much money pouring into infrastructure, investors feel they need to protect themselves from GPs losing their discipline in a hot market.”

The hot infrastructure market is indeed a general worry among LPs, according to the survey. Some 66 percent stated their greatest fear was too much new money coming into the sector affecting future returns, although this was down from the 74 percent of respondents who listed this as a top concern in 2019. A new option offered by Probitas this year saw 41 percent of investors note the potential impact of rising interest rates on portfolios as the joint second highest concern. This came alongside the 41 percent that believe the market to be at or near the top of the cycle, a concern listed by 55 percent in 2019, with this fall mitigated by a rising interest in the energy transition, according to DePonte.

“Renewables have become more of a focus. Investors feel they need to do more on the renewables side. Overall, they feel like they’re at the top of a cycle. Energy and digital are at the top right now and there’s demand driving those sectors,” he said.

Investor indifference

The rise of open-ended funds has been a key theme in recent times in the infrastructure market, with Stonepeak the latest major player to launch an open-ended offering. However, only 12 percent of the survey’s respondents indicated a preference for such fund structures, down from 14 percent in 2019, while the largest proportion of respondents (36 percent) still prefer a 10-year private equity-like structure,

That, though, is only half the story. Only 12 percent indicated a preference for a 12 to 15-year fund life, down significantly from 29 percent in 2019. This led to 36 percent stating they had no preference as to whether funds were open or closed-ended, a figure which stood at just 17 percent in 2019.

“People are trying to go where they’re getting the return,” DePonte explained. “A number of people interested in more traditional assets like transportation assets, there was a desire to hold on to that as long as possible, but a lot were uncomfortable with going to a very long maturity structure or going with evergreen structures, so they’re trying to go with this middle ground.”

Investors, though, were clear on what they expected from open-ended funds. In 2019, only 53 percent of respondents expected open-ended fund returns to be less than 10 percent, a figure which in 2022 has risen to 100 percent.

The survey was carried out in the last week of June and first three weeks of July. Some 56 percent of its respondents were US-based, 35 percent in western Europe and the UK, 5 percent in Asia and 3 percent elsewhere.