Seeking an identity

In the 1949 film Knock on any Door, youthful character Nick Romano – standing trial accused of murder – utters the famous words: “Live fast, die young, and have a good-looking corpse”.

This demonstrates that not everyone values maturity. But for those hoping that the infrastructure asset class has a viable long-term future, there was some good news in a recent survey of institutional investors by placement agent Probitas Partners.

It found that 59 percent of institutional investors overall now have a separate portfolio allocation for infrastructure. Furthermore, among more experienced investors, this figure rises to 74 percent.

This represents remarkable progress given that, six years ago, the equivalent survey discovered that a mere quarter of investors viewed infrastructure as being worthy of its own allocation. Four out of ten were, at the time, making infrastructure investments from their private equity pots.

Permanent place

By carving out a specific slice of the portfolio and dedicating it to infrastructure, it implies that investors have taken a view of the long term and decided that infrastructure deserves a permanent place. That must give fund managers in the asset class some reassurance.

If so – and if you are an infrastructure fund manager – you might want to stop reading at this point and flick to the next page. Why cloud positive thoughts? You’d be better off revisiting this column in the next issue. Goodbye till then.

For those who have chosen to read on, the same survey offers other observations that challenge assumptions about the asset class’s longevity. Notably, 39 percent of investors canvassed by Probitas had no target allocation to infrastructure. In other words, they dip into the asset class and just as easily dip out. They are opportunistic. They are not committed.

Furthermore, there is no universal agreement on how to benchmark infrastructure. One thing is clear: there is a much reduced tendency to favour an absolute return target. Instead various benchmarks are applied including internal proprietary benchmarks as well as those based on inflation indices and publicly traded securities indices. In the words of the survey, “no benchmark is dominant”.

No fund structure is dominant either. “Unlike private equity funds where fund terms have substantially standardised, there remains a broad variety of fund term structures in the infrastructure market,” says the survey. Where there is a constant, it’s a strange one: investors which back funds targeting decades-long concession agreements tend to want the funds themselves to be 10 years long, it seems.

It’s interesting to reflect that many in the asset class have questioned the applicability of the ten-year fund structure, which is a reminder of infrastructure’s roots within private equity. Pre-Crisis, certain infrastructure funds not only had private equity-like fund structures and terms, they were also as guilty of overpaying and over-leveraging as their leveraged buyout counterparts.

In a way, that form of infrastructure investing really did ‘die young’ – post-Crisis, it was impossible or almost-impossible to raise infrastructure funds on the same terms as pre-Crisis. But the Probitas survey is a reminder that infrastructure 2.0 is not yet very well defined. Investors don’t yet know whether to commit to it, they don’t quite know how to benchmark it, and they’re not really sure how best to access it.

There’s no doubt that investors remain very interested in infrastructure, which they increasingly see as a distinct area of investment. Equally, infrastructure as an asset class is still at a formative stage and achieving maturity remains a distant prospect.