Like your strategy – not sure about your fund

At placement agent Probitas Partners, dedication to the cause of infrastructure asset class research always takes precedence over Christmas preparations. While other professionals might be guilty of starting to relax a little, their thoughts perhaps turning to the office party (you know who you are), at Probitas the lights are still flickering late into the night as the finishing touches are applied to the firm’s customary annual review of investor attitudes towards infrastructure. 

When the 2011 version landed on desks (including mine), a first glance appeared to suggest that core brownfield fund managers would be justified in popping open a few Champagne bottles over the festive period. 

After all, there was plenty to celebrate for the asset class as a whole. For example, the year saw the proportion of investors with specific infrastructure allocations rise from 32 percent to 48 percent, indicating that those canvassed were becoming more comfortable with the asset class and more inclined to view it as a permanent feature of their portfolios. More good news was that 70 percent of investors said their appetite for infrastructure would either increase or remain the same in 2012 – compared with almost none who considered their appetite to have decreased.

These are just a couple of extracts from a survey which provided plenty of other evidence that the infrastructure asset class is viewed favourably by limited partners (LPs). And – to come back to the earlier point – core brownfield strategies were placed at the top of the pile. Of all the various approaches to infrastructure investment taken by fund managers, it was this one that investors most wanted a slice of.

But (the dreaded ‘b’ word), one or two other findings from the same survey suggest the fizzy stuff might be best left on ice – at least for the time being. During the year, the number of investors actively seeking  direct investments in core brownfield assets doubled from 25 percent to 50 percent. The survey found that while investors embrace the risk/return profile and maturity structure of core brownfield assets, they increasingly felt that they did not fit well in fund structures (see also our fund formation cover story, p.14).  

Moreover, even those comfortable with the theory of placing core brownfield assets in funds are not so comfortable with the fees being charged. Asked for their views on what most keeps them awake at night (aside from the new baby), the second-most-popular response was this: “Standard fee levels on brownfield focused funds are eating away at my returns”.

Don’t dwell in the past

Anyone tempted to conjure with private equity-style “2 and 20” compensation for a core brownfield fund stands accused of wallowing in nostalgia if this survey’s findings are a decent guide. The only conclusion can be that the go-go days have gone-gone. Over 70 percent of respondents said 1.25 percent was the maximum management fee they would be prepared to pay, while more than half (54 percent) said carried interest should be no more than 10 percent.

Of course, to return to the festive references used earlier, no one would expect turkeys to vote for Christmas. In the same way, no one would expect fund investors to vote for higher fees and carry. But at a time when, not only is the fundraising market still riven by headwinds but LP threats to go direct carry increasing weight, fund managers do need to be very sensitive to what investors are telling them.      

So, it is with mixed feelings that core brownfield managers will make their way through 2012. On the one hand, they are being told that they are targeting a popular strategy. On the other, they can forget any thoughts about that popularity being reflected in fund economics. Investors are sending a message that they will go direct if they have to. Many are not convinced that core brownfield assets belong in funds and they will certainly not overpay for the privilege.