Probitas Partners, the California-based placement agent, has become a regular and incisive commentator on trends within the infrastructure asset class. We examined the new 2015 version of its Institutional Investor Trends survey and isolated a ‘top 10’ of emerging themes:
1. That ‘top of the market’ feeling: Brace for the bumps is one piece of advice from the survey’s authors. Global fundraising hit a near-record high of $38 billion last year, and stayed strong at $18 billion in H1 2015. This at a time when identifying opportunities to put the money to work is challenging. “A lot of people are saying ‘Gee, this is starting to feel a bit like 2007-8’,” says Probitas managing director Kelly DePonte.
2. Debt’s ‘wait and see’ period: In 2013, debt funds accelerated from 12 percent of total infrastructure fundraising to 23 percent. In 2014, that figure tumbled down to just 7 percent. DePonte believes the ‘sub-universe’ of investors prepared to invest in infrastructure debt mostly made their moves in 2012/13 and are now waiting (perhaps with bated breath) to see how it plays out.
3. Greenfield still getting a bad press: Despite the intense competition for core brownfield assets, greenfield is not proving to be the beneficiary. Pure greenfield funds accounted for a mere 4 percent of the global fundraising total last year. Observers wonder aloud whether some of the risks associated with greenfield are real or perceived.
4. ‘Too much money’ claim almost universal: “People always say there is too much money and that it will hit returns,” acknowledges DePonte “but the number of people now saying it is telling.” Some 74 percent of investors now say it is their greatest fear about the asset class, compared with just 31 percent in 2010.
5. Emerging markets more popular – but volatile: Appetite for emerging markets picked up last year after hitting a record low the previous year. However, the report notes that sentiment tends to change greatly from one year to the next. With notable problems in emerging markets currently, 2015 may again be a different story.
6. No bucket of choice: The big change has been investors including infrastructure in their real assets allocation, which moved up last year to 48 percent from 22 percent. But some have a separate infrastructure allocation, some put infrastructure in the private equity or ‘general alternatives’ bucket, while others put it in the emerging sub-category of ‘inflation-hedged’.
7. No fund structure of choice: Unlike in private equity, there is no standardised infrastructure fund structure. Last year saw interest in classic private equity-style 10-year structures dropping from 44 percent to 34 percent while interest in 10-year ‘hybrids’ increased. Interest in evergreen and open-ended structures declined.
8. Thinking global: Funds with a global focus on developed markets continue to be the most popular choice for investors. Regionally, investors prefer Europe, with North America currently lagging behind. When it comes to individual countries, Australia is attracting growing attention.
9. Mixing green and brown: Value-added brownfield is the fund strategy of choice, with investors keen to back brownfield assets that need some form of rehabilitation. Investors are moving towards direct investment for core brownfield assets. When investors do invest through a core brownfield fund manager, they are exerting huge pressure on fees and carry.
10. Maturity has been reached: In Probitas’ equivalent survey in 2010, the top issue keeping investors awake at night was the lack of experienced fund managers in the asset class, with 34 percent of investors citing it as a fear factor. Last year, this percentage fell to 11, with many managers now raising their third funds and track records beginning to stack up.