Appetite for the asset class is rocketing as LPs seek out yield in a low interest rate environment, while favouring inflation-hedged, non-cyclical investments in anticipation of a shift in the macroeconomy.
However, an increasingly sophisticated investor base also remains highly selective. Only those managers that deliver – on track record, depth of team, operational rigour and, of course, ESG – will continue to comfortably raise funds.
Some sectors are proving more popular than others, with energy transition and digital themes emerging as clear winners during the pandemic. Investors are not ready to throw in the towel on transport, either, though the traditional energy sector has undoubtedly fallen from grace.
Core-plus and value-add strategies are attracting the most attention. Appetite is also growing for firms with a disciplined mid-market focus.
For a full rundown of what LPs are looking for in an infrastructure manager today, here are the seven charts that really matter.
Top of the class
Close to two-thirds of LPs active in infrastructure plan to increase their allocation to the asset class over the next year – more than is the case for private equity, private debt, venture capital or real estate. Meanwhile, 30 percent plan to retain their current level of exposure and just 3 percent are scaling back. This display of appetite reflects pervasive under-allocation in the asset class, as well as a shift towards inflation-hedged and stable investments as LPs prepare for a possible change in the macroeconomic environment.
Notwithstanding the high levels of appetite for infrastructure among investors, the majority prefer to play it safe with established names. More than half of LPs do not invest in first-time infrastructure funds at all, while 16 percent plan to invest less in emerging managers over the course of the coming year than they did over the previous 12 months. Exceptions to the rule tend to display strong differentiation and are typically sector specialists that are often focused on sustainability or digital infrastructure.
Renewables and digital infrastructure are the most popular sectors with LPs, followed by social infrastructure. Investors have not written off transport, with more than a quarter planning to invest more in the space in anticipation of a post-covid recovery, and a further 55 percent planning to retain their current exposure. Energy’s fall from favour appears more permanent, however, with 31 percent of investors planning to deploy less in this sector.
Interest rate fears
Although infrastructure is benefitting from investor concerns over a potential rise in inflation, the asset class is not immune to rocketing prices. Any associated rise in interest rates could prove damaging. More than a quarter of investors cited rising interest rates as their primary concern when it comes to the performance of their infrastructure portfolios, compared with just 10 percent a year ago. However, LPs are most concerned about the impact of regulation, political instability and frothiness in the market.
Core-plus and value-add strategies are attracting the most attention from investors, with 83 percent and 80 percent respectively planning to invest the same amount or more in those segments over the next 12 months. However, as large institutions increasingly look to replace negative yielding fixed-income instruments with an asset class that offers similar risk profiles with the added benefit of yield, core may make a comeback.
The more recently dubbed ‘super-core’, where 14 percent of investors predict they will increase their exposure, may also grow in popularity.
ESG in the ascendency
Almost three-quarters of investors believe that the adoption of a strong ESG policy will lead to better long-term returns in their private market portfolios. ESG is clearly becoming a more important component of LP due diligence. In addition to LP pressure, the proliferation of regulation, particularly within the EU, is driving momentum behind an increased focus on ESG, which is proving a natural fit for an asset classed charged with delivering on environmental and societal goals.
More than three-quarters of LPs do not plan to make commitments to dedicated infrastructure secondaries vehicles over the next 12 months, as the majority of secondaries transactions continue to be led by institutional investors, rather than specialist managers. However, that could be set to change. In 2020, Blackstone Strategic Partners raised a $3.75 billion infrastructure secondaries fund, and both Landmark Partners and Stafford Capital Partners successfully hit final closes in 2021. More firms now appear to be getting in on the act, with both Macquarie and Brookfield preparing to enter the market.