A rejection of 2 and 20

Fewer than one in ten investors in infrastructure think a 2 percent management fee on committed capital – a market-standard term in private equity – is acceptable for an infrastructure fund, according to a new survey conducted by PEI Media, publisher of Infrastructure Investor.

The survey of institutional investor sentiment in the global infrastructure market, to be found in a new book, The Definitive Guide to Infrastructure Fundraising, published by PEI Media and edited by law firm SJ Berwin, found that the majority of investors want management fees set below 1.4 percent. A quarter of respondents said a 1.5 percent fee is acceptable, while just 9 percent of those surveyed found 2 percent fees appropriate for the asset class. All 48 of the investors surveyed agreed that management fees should reduce after a fund’s investment period has concluded.

Two-thirds of respondents said the level of carry for infrastructure funds should be set at 15 percent or lower, with just 17 percent agreeing that the private equity standard of 20 percent is appropriate to infrastructure. A clear majority of respondents (67 percent) favour the whole-fund method of carried interest where reward is based on the performance of the fund as a whole, rather than the deal-by-deal method (17 percent), where carry is paid out on an investment-by-investment basis. 16 percent had no preference in this respect.

In terms of the hurdle rate for earning carry, half of investors surveyed liked the standard 8 percent level. 25 percent preferred a more demanding 10 percent hurdle rate. 17 percent favoured a less demanding 7 percent hurdle, while a small minority indicated they would like the hurdle to be set at inflation plus a fixed percentage, depending on the fund.
The survey also revealed that placement agents featured in two-thirds of the infrastructure fundraising campaigns that respondents have been involved in. Four out of five investors insist on a key-man clause when making allocations to an infrastructure fund. In making the decision to allocate funds to infrastructure, third-party consultants play an important role in a quarter of allocations, while in-house investment committee decisions account for 42 percent of allocations.

The most popular sectors with investors are energy and power, water and transport, with 67 percent, 58 percent and 50 percent of respondents respectively investing in funds focusing on these areas. 42 percent said they had no sector preference. 

When asked whether they would increase their allocations to the asset class, less than one in five of investors were sure they would. The remainder were split almost equally between those who would definitely not increase allocations and those who were not sure. 

Interest in secondaries funds is strong, with two-thirds of investors considering investing in them. 17 percent would consider investing in funds of funds, while 16 percent would not invest in either secondaries funds or funds of funds. 

The relative youth of infrastructure as an asset class was laid bare in one question, with almost 60 percent of investors saying they have been investing in infrastructure for less than three years. In terms of exposure, two-thirds of investors allocate 5 percent or less of their portfolio to infrastructure. Less than one in ten allocate over 10 percent.

When it comes to the fundamental question of why investors invest in infrastructure, a resounding 83 percent see it as part of an overall portfolio diversification strategy. More than half are motivated primarily by its stable, long-term returns.

For more information on the book, please visit www.peimedia.com/infrafunds.