LP Perspectives: The proof and the pudding

There are significant challenges to assessing the performance of infrastructure: the asset class still lacks a meaningful track record; and no agreed benchmark has yet been designed to judge achieved returns against. But according to LPs, this is slowly changing. “It’s probably easier now to see benchmarking clearly and do proper comparisons than when we started investing in this a year or two ago. So it’s improving but it’s still got some way to go,” says Strathclyde’s Finnie.

This is corroborated by the first findings of our performance section: LPs do have methods to assess their infrastructure investments’ performance, but these differ widely depending on the chosen strategy. Benchmarking assets in terms of absolute rate of returns is the most common approach (chosen by 46 percent of respondents), but a significant minority also use an “inflation plus margin” target (25 percent) while others compare their figures with a peer group of unlisted infra funds (11 percent). It is notable that only 4 percent assess portfolio performance against a listed infrastructure index.

Whatever method they use, are LPs happy with the performance of their past fund investments? That tends to vary according to vintages, our study finds. A majority of those who invested prior to 1995 do not seem too satisfied with the results so far, an observation which also holds true, albeit in a less pronounced fashion, for the 1996 to 2000 vintages. More positive are LPs in vehicles dated 2001 to 2005.

But it is from 2006 onwards that the balance tilts towards optimists (with investors saying funds have matched expectations or surpassed them representing two-thirds of the votes). More than 80 percent also thought their infrastructure portfolio’s returns would be equal or superior over the next 12 months than they have been during the last.

With high return expectations thus being nurtured, it is perhaps logical that a number of investors start setting their sights on other corners of the asset class. While most LPs think they’ll crank up their exposure through primary funds, for instance, about 28 percent say they intend to start investing or increase their secondaries activity. More than 54 percent say they have no plans to manage their portfolio via such transactions over the next 12 months but a sizeable 43 percent seem willing to do so by buying on the secondary market.

Infrastructure debt is also attracting attention, with 23 percent of investors keen to develop or increase their exposure to it in the coming year. More than 40 percent intend to invest in subordinated or mezzanine debt, while 32 percent say they’ll target senior debt. Distressed debt, unitranche and collateralised loan obligations (CLOs) didn’t fare as well, with investor interest ranging in the single digits.