Limited partners intensify interest in infrastructure

With bleak economic news continuing to cast a cloud, infrastructure funds will spy a silver lining as a new survey points to an increasing appetite for the asset class and a growing number of dedicated allocations.

‘Tis the season to be jolly but, with the Eurozone crisis continuing to hamper the global economy, festive cheer can seem thin on the ground. Infrastructure fund managers however, will be raising a glass to a survey from placement agent Probitas Partners which shows limited partners warming to the asset class.

The Infrastructure Market Review and Institutional Investor Trends Survey for 2012 found that 70 percent of respondents would either keep their infrastructure allocations the same in 2012, or would increase them compared with 2011. Around 25 percent said they would invest in the asset class only on an opportunistic basis – a slight decrease from last year – while “almost none” said they had a decreased appetite.

Specific allocations to the asset class have grown markedly. The survey found that, going into 2011, over 60 percent of respondents were without a specific allocation to infrastructure. That figure has now fallen to 37 percent. Among those who have been investing in the asset class for more than a year, 74 percent expressed the view that infrastructure should have its own separate allocation.

One finding that may go down less well, however, is that nearly 50 percent of respondents were now actively pursuing direct investments in infrastructure, representing double the 25 percent that were doing so a year ago. Supporters of direct investments said they “liked the risk/return profile and maturity structure of these assets, but felt that they did not fit well into fund structures”.

Despite this view, closed-end funds were seen by respondents as the most preferred type of investment vehicle as well as being the most common. Interest in alternatives to the 10-year structure “remained fragmented”.

Funds of funds were the least preferred vehicle, with 83 percent of respondents saying they would not invest in them (though this is down from 96 percent a year ago).

Other key findings from the survey include:

*Core brownfield assets remain the primary target of infrastructure investors, although the fundraising market reveals “substantial” interest in opportunistic funds that also attact private equity investors.

*Investors expect net returns of 12.5 percent or less and low volatility on brownfield assets and “insist” on fee and carry structures of less than “2 and 20”.

*There is a “marked shift” away from emerging markets in general, although interest in Asia is strong relative to other emerging markets. 

The survey canvassed the views of 75 senior investment executives within public and corporate pension plans, funds of funds, family offices, endowments and foundations, consultants and advisers, and others.