Sovereign funds may have fewer constraints than many LPs, but that doesn’t mean they are always sovereign of their destiny. In fact, as far as infrastructure is concerned, it seems they are getting increasingly frustrated.
A star of the alternative universe amid rock-bottom interest rates, infrastructure has lost some of its shine after a “near-uniform tilt” by sovereign institutions prompted “supply challenges and delays”, Invesco found in a recent study. One statistic tells the story: respondents expected it would take them four years to reach their infrastructure allocation target in 2017, compared with three-and-a-half years in 2016. The same measure remained unmoved at two years for real estate – prompting sovereigns to start favouring the latter over infrastructure, according to the survey.
Invesco’s analysis suggests infra has further reasons to worry – if speed of deployment is causing SWFs’ decisions to go underweight, then surely the same must apply to the broader LP community, notably insurers and pension funds?
But things may not be that simple. Anecdotal evidence seems to indicate that infrastructure funds are getting raised at an ever-faster pace – think of GIP’s $15.8 billion Fund III, closed in about 14 months; or EQT’s €4 billion Fund III, raised in less than six months. If that were true at large, it would imply that demand for funds is probably outstripping supply, pushing LPs to sign cheques as if money was burning a hole in their pockets.
Yet, more exhaustive analysis shows the reality is not that clear-cut. According to Infrastructure Investor data, funds closed in 2016 took, on average, 11 months to raise – one month less than in 2015 but broadly on par with every other year since 2011.
And there are other reasons to doubt that the relative scarcity of assets is discouraging LPs from getting involved with the asset class. Indeed, market observers we canvassed largely disagreed with that claim. “I have yet to come across anybody who is looking to reduce their target allocation to infrastructure. They’re either wanting to keep it flat or increase it in percentage terms. The question, rather, is how much they really care if they don’t hit that target,” a placement agent told us last month.
That’s the crucial bit. For a start, some LPs do not have an allocation target for infrastructure, preferring to stick it into a broader alternatives bucket. Others – and an increasingly growing number, including heavyweights such as CPPIB or CalSTRS – have set targets for real assets, a label that also covers real estate and agriculture. Such a categorisation allows them to make relative value judgments between the unit’s respective components, so that slower growth in infra needn’t always be a headache.
A number of LPs, obviously, do have infrastructure allocation targets. But even when ‘strategic directions’ exist in principle, it is unclear how bound the investment team is to meeting them. “Not everybody, by any means, has a hard-and-fast allocation which needs to be met. Many recognise that if you do that, you just encourage your staff to pay up,” says an advisor.
Does that mean SWFs are a case apart? Well, maybe. Another reason why such institutions – state-backed by definition – may be growing warier of infrastructure is that the asset class is getting more politically sensitive, with nations such as Australia and the UK ramping up their scrutiny of foreign investment into “strategic” assets. And, of course, some SWFs have seen their firepower reduced as oil prices remain in the doldrums.
Allocation targets should be viewed as strategic guidance, rather than rules set in stone. With prices for core infrastructure assets at the levels they are today, investor discipline shouldn’t be confused with disappointment.