Outlook 2014: Direct investors to outnumber fund managers

While there is no doubt 2013 was a year of landmarks for fund managers – including a number of high-profile fundraises and deals – 2014 will likely see a significant milestone passed by direct institutional investors, says Valeria Rosati, executive director for Europe at Hastings Funds Management.

“We expect to see the number of pension funds investing directly in infrastructure exceed the number of fund managers, purely by number rather than volume of capital.”

She thinks the entrance of such new players on the auction scene will drive strong competition and increased pricing next year. In her view, this will result not just from the greater flows of capital going into the asset class – but also from the streamlining of competitive processes, which will encourage more market participants to compete for certain deals.

These changes will happen on a background of changing macro-economic conditions, with the tapering of quantitative easing and a rise in real interest rates late next year likely to have a dual effect on the market next year.

For one, Rosati believes the unwinding of sizeable bond purchases by central banks will impact liquidity and the balance between supply and demand. “This will drive a flight from yield to growth.”

Importantly, she reckons it is also this concern about increasing real rates that makes regulated assets so sought after today.

But other areas of the market should also benefit, she notes. If 2013 saw infrastructure debt rise in prominence on investors’ radar, she thinks prospects for the asset class look even better next year.

“We expect senior debt investment from institutions to rise in the infrastructure sector. This will be accompanied, in our view, by greater access to long-term debt issuance for social infrastructure projects – which should rise in number next year as funding increases.”

Demographic dynamics in Europe, combined with the fiscal challenges many governments continue to face, will feed in a healthy supply of potential investments. Rosati thinks the pipeline looks especially promising for European regulated utilities and energy assets, while privatisations in North America and Australia should also offer interesting opportunities.

Yet perhaps an equally interesting development in 2014 will be the continued rise of the secondary market, Rosati concludes.

“Many closed funds date back to the 2006 and 2007 vintages, so we think secondary transactions will continue to provide good supply next year. Come 2014 there should be even more of this type of deal flow than we’ve seen in 2013.”