A recurring feature of the past couple of years has been the looming shadow of direct investors, the visibility of which has become a major source of existential questioning on the part of fund managers. It’s not hard to see why: a rising category of investors have as much firepower as they have limited liabilities, enabling them to bid high; they’re also bolstering their teams to be able to execute more rapidly.
“There’s an increasing competition for trophy assets of €1 billion and more. Large investors like sovereign wealth funds have a lower cost of capital and don’t have the same return targets as core infrastructure funds,” notes Yielco’s Fleischhauer.
The first question of our study dedicated to investment structures, asking whether LPs were content with the portfolio of funds they’re currently invested in, gives a hint of their ambition to go direct. Despite many of them looking to increase their allocation, a majority – about 52 percent – think they are currently working with an “optimal” number of managers. A sizeable minority (42 percent) still plans to back new firms in the coming months, while only 6 percent want to cut down on their number of relationships.
Similarly, LPs’ most favoured structure for increasing their infrastructure exposure is co-investments, with 39 percent of respondents saying they will make new ones over the coming 12 months. About 26 percent also believe they will be securing direct investments. Yet about 33 percent think they will commit to new commingled funds in the coming year, suggesting that, despite their will to go direct, many LPs do not yet feel capable of sourcing deals directly. And when they do, their appetite for co-investment suggests they’re not that keen to do them entirely on their own.
“We’re considering looking at the co-investment option. Possibly not for 2015 but hopefully for the following year,” says Finnie of Strathclyde.
This is confirmed by the finding that, out of the diversified array of LPs we polled, more than 65 percent intend to make at least two new fund commitments over the next 12 months. The majority thought two to three new investments would suffice, but close to 25 percent said they wanted to pledge money to four new vehicles or more during the period.
“Institutions feel they are underestimating the risks of dealing with direct assets so they’re increasingly looking to build diversified portfolios by focusing on fund investments. They want to build partnerships with leading fund managers and then try to do some co-investments alongside them,” argues Fleischhauer.
It was also interesting to witness nearly 30 percent of investors looking to make new secondaries investments next year – a sign that, in infrastructure too, LPs are starting to see them as a helpful way to rebalance their fund commitments.