In financial newspapers around the world, macroeconomic worries continue to make headlines. But in the mind of infrastructure investors it is a different matter that is now occupying top spot: regulatory concerns.
The two are of course closely related: stagnating purchasing power means political pressure on the regulator to keep a lid on prices; tight public budgets put in jeopardy previously generous subsidy regimes. No wonder why, when we asked LPs to rank their structural concerns in order of importance, regulatory change was the one voiced most often.
“It’s a risk factor that has perhaps been underestimated in the past. Now there are also increasing concerns about regulation in so-called ‘established’ markets and some institutional investors are looking for investments outside the realm of strictly regulated assets,” says Uwe Fleischhauer, a founding partner and managing director of German-based asset manager Yielco Investments.
Interestingly, however, regulation comes behind high levels of competition as the issue ranked first by investors (with 43 percent of the votes against 49 percent). This isn’t true across all geographies: both items share the top spot in emerging markets, while regulation continues to dominate in Western Europe. The gap is starkest in North America, where nearly five times more LPs thought high competition was a bigger issue than regulation.
The next to feature in the top three was investor disillusion with performance or strategic drift, suggesting that some LPs are readjusting their risk/reward expectations of the asset class and remain confused by the diversity of approaches offering exposure to it.
Yet political sentiment was more often cited as a first-ranking concern. A question specifically dedicated to political uncertainty confirmed this, with 56 percent of respondents considering it a major factor when deciding where to invest. This sentiment, surprisingly perhaps, was less prevalent in emerging markets than it was in the Western world.
“Political and regulatory risks may not be increasing per se but there is a risk of contagion: governments and regulators influence each other,” observes a senior strategist at a Northern European pension fund.
Infrastructure investors are almost equally worried about changing tax regimes and industry regulation. This is a sign that the dust has yet to settle on topics like Solvency II and the AIFMD (Alternative Investment Fund Managers Directive), with many questions yet to be answered regarding their implementation.
The third tier of issues, which included financing, refinancing, public perception of private capital and lack of investor awareness were the least often cited, perhaps a result of the return to relatively abundant liquidity and fruitful efforts to make the case for investment in infrastructure.