LP Perspectives: Back to basics

A good number of investors will tell you that they chose to start an infrastructure programme because, at a time when mainstream assets are generating ever-more meager returns, they want to earn enhanced yields through a lower-risk asset class.

“We as a fund are relatively well funded and it makes sense to be investing in assets that we believe will match our liabilities,” says George Finnie, investment manager at the £13.9 billion (€17.17 billion, $21.40 billion) Strathclyde Pension Fund.

Yet many have yet to fully understand exactly where the performance promised by infrastructure comes from. More than 60 percent of respondents said that understanding and influencing the drivers of returns ranked among their top three concerns relating to portfolio management, and the issue was also the one chosen most frequently as the key priority in that field (receiving nearly 26 percent of the votes).

But investors do not seem to forget the other side of the risk/reward equation. Being able to embrace more active risk management came a close second in our portfolio management poll, and was the one most regularly cited as first area of concern in Western Europe. It was also the one most often ranked among the top three in North America, and seemed equally well anchored in the minds of emerging markets investors.

“Many institutional investors make the assumption that investing in infrastructure in general is a lower-risk way of earning yield. But those investors who do not carefully look at the specific risks of each business in which they are considering investing may be very disappointed in the outcome,” says Joseph Ferrigno, founder and managing partner of Hong-Kong-based Asia Mezzanine Capital Group.

Establishing a reliable benchmark for the performance of infrastructure assets was also an area of potential progress regularly highlighted by investors – although exactly what is needed is not always agreed on. “I’m not sure the word ‘benchmark’ really captures it. What would help mostly is a clear set of definitions or rules that states what can be considered a core infrastructure, core plus or opportunistic strategy,”says a European pension fund executive pension fund executive.

As far as investment strategy-related issues are concerned, recruiting and retaining the right people seem to rank as a key priority. But comments suggest the issue is less that of an insufficient pool of talent than one of successfully finding and attracting them. “Whether they come from project finance or infrastructure teams within banks and the industry itself, there are a lot of very experienced people in the market,” says Yielco’s Fleischhauer.

The poll also revealss a gap between LPs’ willingness to do direct or co-investments and their self-perceived capabilities to do so, indicating perhaps that some of them have realised through experience that executing such deals require a great deal of time and resources. “A number of investors thought it might be easy to go direct. But in the end few of them do it,” notes Fleischhauer.

The value of emerging managers and minority programmes, as well as that of placement agents and gatekeepers, did get frequently mentioned – although more rarely in first place. Funds of funds came last, suggesting that the relatively smaller universe of funds to choose from in infrastructure, and the lower average returns allegedly earned in infrastructure compared to other alternative asset classes, did not often seem to justify adding another layer of fees in the mind of many LPs.