Why have German investors tended to circumvent funds of funds in the past?
FP: Many German limited partners (LPs) have made their first infrastructure investments on an opportunistic basis without having a defined strategy for the asset class. Now that the asset class is developing they realise that funds of funds or managed account partners can be very helpful screening the market and helping them to select the right opportunities.
And many of the early commitments by German LPs appeared to be in renewable energy. Why?
FP: A lot of the earlier renewable energy investments were offered to the LPs as being an almost risk-free infrastructure investment. Construction risks were low and feed-in tariffs were government backed. Unfortunately there were risks related to the assets and soon thereafter they found themselves invested in an underperforming wind farm or a solar PV asset that was affected by retroactive changes in tariff.
What is the attitude of German LPs to funds these days?
MR: Many invested into infrastructure in 2006 to 2007 on a single-fund basis and got hit by issues. Now they are re-considering their broader portfolio and having a closer look at what else is out there. Initially, a lot of fund investing was on the basis of brand names. Now they’re open to smaller funds and less common brands.
And why would you argue that they should now be using funds of funds?
FP: Now the market is heating up. It’s a young asset class and people can grow with it. But to do it without support would be dangerous.
MR: In this market, you need guidance and the likes of consultants and funds of funds will help you to assess the risks. You have to take into account that this is an asset class where there is currently a lack of data.
Are some of these investors not able to invest in the asset class directly?
MR: It all depends on size and volume and the skill set of the LP. For funds of funds, there are still the small and medium-sized LPs who will never have a chance to build a diversified infrastructure portfolio. So there will be a need for the funds of funds concept. Some of the larger LPs are in an intermediate phase where they want to go direct but it’s not as easy as they initially envisaged.
There appear to be only a handful of funds of funds operating in the infrastructure space today. Why is that?
FP: There are very few funds of funds in the infrastructure space. Globally, there are only around 12 which, compared with buyouts funds of funds, is an interesting number. But, in our view, it’s a good proposition. By opting to invest with funds of funds, you can get exposure to smaller funds and to hidden champions.