Perspectives: LPs prioritise existing relationships

Investors show little appetite for first-time managers and GP stakes activity is heating up.

The majority of LP respondents to the study are planning to increase their number of GP relationships in the year ahead. However, fresh waves of covid restrictions are likely to make this hard to achieve, with niche players and, in particular, new managers losing out to mega franchises and brand names.

In 2020, the top 50 infrastructure managers added $78 billion to their coffers. The biggest players’ share of infrastructure assets under management grew to more than 40 percent during the year. At the same time, almost half of investors will not back a first-time infrastructure manager and almost a quarter plan to scale back their investment in new teams.

“The number of LPs that have genuine first-time fund appetite has certainly declined over the past few years,” says Threadmark co-founder Bruce Chapman. “First-time funds are only achievable if the proposition is clearly differentiated and there aren’t sufficient established alternatives that the market can tap into.”

“Investors are becoming more selective about first-time funds,” adds Tavneet Bakshi, partner at FIRSTavenue. “At the same time, established managers are significantly expanding their fund sizes and coming back to market more quickly, in the knowledge that the marketing process is likely to take longer right now.

“Investors, meanwhile, are prioritising re-ups and are able to put more money to working with existing relationships as fund sizes grow and due to the availability of co-investment. The level of capital available for first-time fund managers seems to be on a downward trajectory.”

There are exceptions. Asterion Industrial Partners, a firm created by a trio of former KKR executives, raced to a €1.1 billion final close for its maiden infrastructure fund at the start of 2020. Sector specialists may also be able to buck the trend. “There are investment themes that are very hot right now, including digital infrastructure and renewables,” says Bakshi. “Digital, in particular, is also a relatively new sector, so there aren’t many managers out there with a long track record.”

However, she adds that even specialists are finding the market tough as established generalists begin to launch specialist funds. GI, for example, raised a $1.8 billion debut data infrastructure fund in September 2020. “It’s difficult for a standalone first-time fund to compete with an established player expanding its franchise.”

Selling a stake

A third of investors have either invested in a GP stakes fund or plan to do so in the future. The sale of minority stakes has become increasingly common across the alternative asset classes in recent years, with the emergence of specialist buyers including Dyal Capital Partners, Blackstone’s Strategic Capital Holdings, Goldman Sachs’ Petershill fund and AlpInvest supporting the evolution.

Managing generational change has been one of the most significant drivers of GP stake sales, and so the more mature private equity and hedge fund industries have inevitably led the charge. Infrastructure typically tracks these longer standing asset classes, however, and GP stakes activity in the asset class is already hotting up.

Recent deals include Sun Life’s acquisition of a stake in InfraRed, Dyal’s acquisition of a stake in I Squared and Power Corp’s acquisition of a stake in Northleaf Capital.

“I think this type of activity will continue and I think it’s a healthy trend,” says Bakshi. “It’s a way of injecting some form of permanent capital into the platform and also helps manage
succession.”