‘Infrastructure fund model is here to stay’

Funds specialising in infrastructure investments have tripled in size since 2007, according to a report from Deloitte. And despite competition from direct investments, the amount of institutional money invested in infrastructure funds ‘will grow steadily over the next few years’.

“The infrastructure fund model is here to stay and the volume of institutional money that is invested will grow steadily over the next few years”.  That is the main conclusion of a report by advisory firm Deloitte, analysing the infrastructure fund landscape in the post financial crisis world.
 
The report, which is based on a survey of more than 30 infrastructure fund managers across Europe, finds a much changed landscape from 2007, the last time Deloitte produced a similar study. One of the most striking changes has been the sheer increase in fund managers active in the market – Deloitte counts over 40 in Europe alone – compared to barely a handful five years ago. Infrastructure funds have also tripled in size in the ensuing period, Deloitte found.
 
However, the global financial crisis and the increase in competition in the infrastructure fundraising market has made it harder and longer to raise funds from limited partners (LPs), the report notes. In the medium term, that will lead to concentration in the space, with Deloitte expecting a smaller number of active fund managers in the market when compared to today. 
 
The advisory firm has also found a sea change in the investment strategy of infrastructure funds when compared to 2007. 
 
“The survey findings indicate a distinct market evolution. The infrastructure funds market has developed to be less reliant on highly leveraged structures for its returns. Rather the market has almost uniformly as a sector shifted focus back to core infrastructure assets that can deliver the stable long-term cash flows desired by their traditional pension fund investors,” argues James Riddell, infrastructure funds partner at Deloitte.
 
This means that, while most funds being raised today still target the same low to mid-teen returns they did in 2007, the way they go about generating those returns for their LPs has changed dramatically:
 
“Back in 2007, our sense was that most funds saw executing the right deals at the right price as the key drivers of those returns. As a result, the skill sets of their investment professionals were oriented towards deal execution. We now see funds seeking to pay more attention to managing and optimising asset performance,” writes Deloitte.
 
The latter is the best defence specialised fund managers have against the increasing trend for LPs to invest directly in infrastructure, with Deloitte saying that LPs’ lack of expertise confines them to the lower-risk spectrum of infrastructure investing, at least for the time being.
 
Deloitte also expects LPs which have invested directly to encounter a few “bumps in the road”, including “regulatory re-pricings, asset obsolescence and bypass risk, new technologies, and the failure of or suboptimal refinancing resulting in yield lock-up or future recapitalisations,” all factors which should benefit third-party infrastructure funds. 
 
Increased demand for asset management expertise will also see a growing number of “retiring utility CFOs and CEOs” join infrastructure funds, the advisory firm predicts.