The fee squeeze

In early July this year, the $7.5 billion Global Strategic Investment Alliance (GSIA) appeared to benefit from a tailwind. For one thing, it completed its first deal when buying a one-third stake in US power plant Midland Cogeneration Venture (MCV) in a transaction reported to be worth around $1 billion. Furthermore, GSIA claimed that its membership was due to expand fairly soon.

There are plenty of observers of the infrastructure asset class who would say that, if GSIA has indeed gained momentum, it’s entirely in keeping with the times. After all, when the so-called investment “platform” was launched with much fanfare back in 2009, it was on the basis of providing access to large-scale infrastructure at rock-bottom prices.

GSIA was the brainchild of Michael Nobrega, president and chief executive officer of Ontario Municipal Employees Retirement System (OMERS). Talking about the low fees charged by the platform, which is managed by OMERS’ infrastructure investment arm Borealis, Nobrega said:

“There will be no negotiation fees, there will be no financing fees, there will be no acquisition fees, there will be no fees on committed capital. All that we will charge the system is a fee structure that will pay…approximately 50 basis points to manage the assets.”

Jury out

As yet, the jury is out on GSIA. The $7.5 billion first closing in April 2012 pulled in four high-profile investors from Japan – the Pension Fund Association, Mitsubishi Corporation, Japan Bank for International Cooperation and Mizuho Bank – all of which co-invested in MCV.

But before declaring the platform a success, sceptics will wait to see whether it delivers on its hint of more capital commitments on the horizon – GSIA initially said it was seeking $20 billion – and whether commitments come from diversified geographic sources.

One thing’s for sure, however. As Richard Clarke-Jervoise, a director at Paris-based fund of funds manager Quartilium, expresses it: “There will definitely be more room for lower priced, customised solutions.”

Indeed, it doesn’t seem unreasonable to ask whether the infrastructure asset class is now at a seminal moment. Clarke-Jervoise speaks of “pressure on economics across the board” and this can be seen in today’s increasing prevalence of managed and customised accounts. He thinks that, proportionately, “there will be more customised accounts in infrastructure than in private equity”.

In addition to the OMERS initiative, the Pensions Infrastructure Platform was launched in the UK in late 2012 (with a £2 billion target) to provide a low-cost investment option for UK pension schemes. This platform was seen by some as a kind of smaller-scale version of Australia’s Industry Funds Management (IFM), which last year notably handed a 12.5 percent fee rebate back to its 70 limited partner investors.

Counter argument

The counter argument to suggestions of a shift away from blind pools with conventional fee structures is that some of these funds have recently enjoyed extremely successful fundraisings. Few will need reminding of New York-based Global Infrastructure Partners’ closing of the largest-ever infrastructure fund on $8.25 billion in October last year. And then, in July this year, came a regulatory filing from Canada’s Brookfield Asset Management, showing it had collected just over $6.2 billion for its second infrastructure fund.

But the statistics do not point to buoyant infrastructure fundraising across the board. As can be seen in the accompanying statistics produced by Infrastructure Investor Research & Analytics, global fundraising totals have remained fairly consistent in recent years with no obvious sign of the much-hyped surge in interest from the investor base translating into a capital bonanza for those raising funds.

Rather than benefitting all funds, the interest in infrastructure appears to be favouring a select few large vehicles. Our figures show that 46 percent of total capital raised in 2011 was by funds worth $1 billion or more. While this was a substantial proportion, the first half of this year saw the billion-plus elite accounting for more than 75 percent – a huge increase on the previous number.

Clarke-Jervoise acknowledges the trend thus: “As we've seen from some of the recent over-subscribed fundraises, the most successful managers will be able to push back on the downward fee pressure from the largest pension funds and raise full-fee products.”

But for many others, facing up to competition from low-cost non-fund alternatives can easily result in having to bend over backwards to meet investors’ demands. “Investors know they have to incentivise you to work hard, but many now see the management fee as ‘cost recovery-plus’,” says Brian Clarke, an executive director at IFM. “It’s not a pure cost methodology, but it [the management fee] also should not be a significant profit centre.”

Get bigger, cut fees

Even for the larger funds, Clarke does not believe there is carte blanche to charge what they like – even as their successes multiply. “Our view is that the benefits of scale should go back to investors and not to the GPs [general partners],” he says. “As you get bigger you should review your fees. There’s a natural flow to that, with the benefits going back to investors.”

A recent survey by US placement agent Probitas Partners found that investors “remain focused on fees and carry paid to managers, especially for brownfield funds”. Some 90 percent of respondents to the study said that core brownfield funds with target returns of 12.5 percent or less and demonstrating low volatility should expect no more than 1.25 percent in management fees and 15 percent in carry (compared with the “two-and-20” model commonly seen in private equity).

The same study found that the second-most-popular concern of institutional investors in infrastructure was that “standard fee levels on brownfield focused funds are eating away at my returns”. Almost 30 percent of respondents expressed this view, with only the amount of competition for infrastructure assets proving to be a bigger concern (57 percent).

Consistent

Of course, to assume that a fee squeeze necessarily means tough times for traditional infrastructure fundraising would be misleading. For the last few years the numbers have remained fairly consistent, rising modestly from $19.0 billion globally in 2010 to $23.5 billion last year (source: Probitas Partners).

Amsterdam-based DIF is one of those to have had a fruitful time on the fundraising trail lately, going past its €750 million hard cap for DIF III to raise €800 million in March this year. Allard Ruijs, head of investor relations and business development at the firm, notes a lot of investor interest in infrastructure in Germany and the US:

“For most of the German LPs in our fund, it was the first infrastructure investment they had made, and potentially there is more money to come from Germany. Also, there will be more US investment in Europe. Twelve months ago they were holding off, but Europe is now viewed as a bit more stable than it was then.”

However, not all funds are finding it as straightforward as DIF to attract investor interest – and economics has a lot to do with that.