Rising competition drives LP adaptation

The relative glut of capital in infrastructure markets is prompting global investors to look for differentiation, leading them to invest in new geographies and capabilities.

Infrastructure may remain a very young asset class – but it is one that is driving interest from global investors, prominent LPs told delegates at Infrastructure Investor’s Berlin Summit today.

This is creating a host of new challenges for established players, said Alain Carrier, managing director at CPPIB. Increased competition for assets had driven pricing up over the last couple of years – to the point where a number of proposed transactions no longer compensated investors for risk.

“Yet infrastructure is not risk-free,” he said.

Panellists argued this had pushed investors to craft creative strategies to break away from the crowd.

Some LPs’ immediate response had been to widen their geographical remit, so as to expand the pool of global opportunities. In addition to Toronto, Carrier said, CPPIB now operates out of London, has opened an office in Sao Paolo, and is considering a move to India in the future.

Such moves were deemed a remote prospect for Charles Woodhouse, heads of funds management at QSuper: going out of the superannuation fund’s domestic market would represent a big step for its members. But the need to beat competition – especially on speed and cost of execution – had prompted QSuper to develop an in-house tax optimisation and structuring team, he explained.

Gavin Merchant, senior investment manager at USS, explained that higher valuations had prompted the UK’s second-largest private pension scheme to look at parts of the capital structure further away from the institution’s traditional mandate. USS invested in convertible debt issued by Globalvia, for example. “You have to think creatively and pick your spot.”

Achieving desired returns also meant looking beyond the transaction. “Buying is one part of the infra investment equation, but holding on to an asset for 20-25 years requires active management to make more of your assets,” Carrier said.

Competition was not seen as the only challenge facing LPs, however. Merchant said that increased regulation remained a looming threat – across all main infrastructure markets.

Christina Yokan, portfolio manager at CalPERS, saw another dimension increasingly coming in the frame: environmental, social and governance (ESG) issues.

“How to incorporate them in investment strategies and qualify what factors to consider are key questions for us,” she said.