Few institutions display their allocations to alternative asset classes publicly and even fewer talk about how these are likely to evolve in the near future – so it’s especially insightful to hear that a whopping 60 percent of the LPs we polled felt under-allocated to infrastructure.
“In the coming years a lot more money will come from large institutions who still think they’re not allocating enough capital to the asset class,” argues Fleischhauer.
By contrast, only 27 percent thought they had already met their target, while a tiny proportion (1 percent) thought they were over-allocated to infrastructure (about 11 percent of our respondents say they have no target allocation and invest opportunistically). This suggests that despite fears of increasing competition and high prices for mainstream assets, few LPs think the asset class is overhyped.
Quite the contrary, says Fleischhauer, who notes that in Germany a lot of regional pensions that didn’t have any allocation to alternatives until recently see infrastructure as the best entry to the category. “Insurance companies are also increasingly aware that an allocation of 1 percent doesn’t add significant value to their portfolio. So they’re starting to define larger allocations, typically between 3 and 5 percent.”
It’s also worth noting that a significant number of LPs now have a bucket of money specifically dedicated to the asset class. Among the investors we polled, 41 percent say they have a separate allocation to infrastructure, a figure that jumps to 59 percent when including those investing from the real assets bucket. Others lump infrastructure together with alternatives (20 percent), private equity (11 percent), or real estate (3 percent).
Whatever bucket they use, a vast majority of investors seem willing to leave their exposure unchanged (44 percent) or increase it (42 percent) over the next 12 months. About 8 percent said they intended to invest opportunistically, while 6 percent said they would decrease it. Tellingly, none of our respondent thought of removing their allocation to infrastructure altogether in the coming year.
“We view infrastructure as an important part of our portfolio and we will be investing in more of it if we can. We’re quite happy with the way things have been going,” says Finnie, whose Strathclyde pension fund invests in the asset class through a bucket of capital earmarked for alternatives. “It is an attractive asset class and we intend to increase our allocation,” concurs a strategist at a large European pension.” And the attraction lies in its ability to generate stable cash flows.”