LP Perspectives Survey 2020: Seven LP trends to watch out for

Click on the top-right corner of the presentation to view full screen.

Investors’ appetite for infrastructure continues unabated. Although the final close for Brookfield Asset Management slipped over into 2020, thus denying 2019 a new fundraising record, the momentum building behind the asset class shows no signs of slowing.

These are challenging times, nonetheless. As global markets adopt the brace position in advance of a potential downturn, investors see infrastructure as a safe haven and commitments to it are climbing. But they undoubtedly have concerns about the prospect of rising interest rates, market turbulence and regulation. Investors are also watching closely to see if deals are being structured appropriately to weather a change in the macroeconomic environment.

With the LP Perspectives Survey 2020 – one of the most comprehensive gauges of sentiment among investors in alternative assets – we asked 146 institutional investors what it is about their infrastructure exposure that keeps them awake at night and how they see the industry evolving.

Climbing commitments

More than a third of investors expect to commit more to infrastructure funds in 2020 than they did in 2019, as institutions continue to build exposure to this burgeoning asset class.

Infrastructure’s low correlation to equities, its limited volatility and inflation-linked protections mean investors see it as offering shelter from a potential storm.

A further 34 percent of investors expect to keep their allocations steady. However, almost a quarter of investors continue to commit to the asset class on an opportunistic basis only.

As global markets adopt the brace position in advance of a potential downturn, investors see infrastructure as a safe haven and commitments to it are climbing.

Underallocation

More than a third of LPs – 35 percent – say they are underallocated to infrastructure. This places the asset class second only to private debt (36% of respondents say they were underallocated to that asset class) in terms of under-allocation and may point to a healthy period of fundraising to come.

A further 29 percent describe themselves as having their optimum target exposure, while just 3 percent are looking to cut back.

However, 22 percent are not currently investing in the asset class at all. This compares with the 18 percent of surveyed investors that have no exposure to private real estate and 11 percent that are not actively engaged with private equity.

Performance measures

A healthy 54 percent describe their portfolios as meeting or exceeding their benchmarks in 2019.

This compares with the 78 percent of investors in private equity funds, the 56 percent of investors in private real estate and the 55 percent of investors in private debt that are satisfied or more than satisfied with the results they are seeing. Only 9 percent say they have been disappointed by their portfolios’ performance.

Relationship building

Almost four in 10 LPs expect to increase their number of GP relationships over the next year, with a further 35 percent maintaining current levels. Only 6 percent claim to be actively looking to reduce the number of managers they are working with, with the remaining 19 percent unsure.

The news is less positive for new entrants to the asset class. More than half of investors do not plan to back any emerging infrastructure managers in the next 12 months and only 5 percent have a defined allocation for first-time infrastructure funds. A further 30 percent plan to back first-time managers opportunistically.

More than half of investors do not plan to back any emerging infrastructure managers in the next 12 months.

Open-mindedness

It appears that investors are keeping an open mind on structures. Although 41 percent favour closed-ended funds and only 20 percent prefer open-ended vehicles, 39 percent have no clear preference at all.

Indeed, there remains an awareness that different types of assets are suited to different fund structures. Open-ended funds are often deemed most appropriate for core infrastructure, with its steady cashflows and long-term investment horizons. Closed-end vehicles are seen to work better for more intense asset management strategies in the value-add space.

Risk levels

The core-plus and value-add segments of infrastructure appear to be attracting the most attention, with 22 percent and 21 percent of investors planning to increase their allocations to those strategies respectively.

There is a strong trend towards maintaining current levels of exposure across the risk categories. However, a significant proportion of investors have yet to proactively manage portfolio construction from a risk perspective, instead favouring an opportunistic approach.

And although infrastructure debt continues to gain traction among investors, more than half are only investing opportunistically.

Just 14 percent are actively planning to increase their exposure to infrastructure debt in 2020.

Biggest concerns

Thirty-six percent of respondents cite regulatory risk as their top concern when asked directly about what worries them most about the performance of their infrastructure investments.

This is perhaps hardly surprising, considering the regulatory flashpoints across the world. Whether it’s UK regulator Ofwat’s decision to move forward with record cuts to permitted returns, or uncertainty surrounding Australia’s chaotic energy policy, regulation is clearly keeping investors up at night.

Frothy markets are also cited as a significant worry, with EBITDA multiples in some sectors reaching eye-watering levels. Political instability and rising interest rates, meanwhile, round off investors’ list of concerns.