A peek inside LPs’ minds

Compared with those who invest money on their behalf, limited partners are notoriously media-shy. A pension fund’s change of allocation target is rarely advertised with a press release and the degree of granularity you get on the pool of investors that pledged to a given fund often stops at the country level.

Building a picture of what LPs have in mind for the future can therefore prove tricky. To try and shed some light on that, we have spent the past few weeks leveraging our market expertise and hard-earned relationships to poll a diversified sample of close to 90 LPs. The survey provides a fascinating snapshot of the market. Here is what we have learned.

THERE IS GREAT MARGIN FOR GROWTH

If you thought investors had had enough of infrastructure, then you are seriously mistaken. More than a third of respondents reckoned they were underallocated to the asset class, twice the number of those who were content with their current exposure. Interestingly, almost as many (31 percent) said they had no allocation to infrastructure. Should they decide to change tack, a new wall of capital might descend on the asset class.

THERE WILL BE MORE MONEY FOR GPS…

While some 30 percent of investors were keen to deploy capital more directly in alternatives, they were outnumbered by those saying they would not change their current way of investing (ie, through funds). At the same time, 42 percent of respondents said they would keep or raise their existing infrastructure target. No surprise, then, that when LPs told us they were keen to increase the number of GPs they would work with over the next 12 months, infrastructure GPs were no exception to that trend.

…BUT PROBABLY NOT FOR FIRST-TIME FUNDS

LPs are by nature rather risk-averse, and especially so when they are talking about infrastructure, which for many is the archetypal low-risk, low-return asset class. But prudence also applies when they choose GPs, with more than half saying point blank they would not invest in first-time infrastructure funds. More encouragingly, 22 percent planned to commit to such vehicles opportunistically, though only 2 percent reported having a dedicated allocation to first-timers.

THE ASSET CLASS IS DOING ITS JOB

It may have become a buzzword among infrastructure pundits, but ‘return compression’ was not something LPs acknowledged. Half of investors who have exposure to infrastructure said the asset class was performing as expected, with another third convinced that it was doing better than initially thought. In short, the asset class was seen as a pretty solid bet, with half of LPs again thinking it would perform just as well over the next 12 months as it had performed in the past.

IT’S THE ECONOMY, STUPID

When it came to pinning down what issues are keeping LPs up at night, respondents pointed to a trio of concerns. While the possibility of a global downturn popped up as investors’ top worry, the low interest rate environment and extreme market valuations followed closely behind. This collective indecisiveness probably has a simple reason: those three scenarios largely go hand in hand.