Segregated accounts to the fore amid infra growth

In an annual survey of global alternative investments, consultancy Towers Watson found that fundraising in infrastructure accelerated in 2014.

Towers Watson's head of investment research, Luba Nikulina, noted that the number of managers active in the alternatives area has more than tripled in the past five years, and said she and her colleagues believe this trend will continue as investors seek diversification and alpha away from traditional sources such as long-only equity.

“Institutional investors continue to plough billions of dollars annually into investment opportunities other than bonds or equities, which are now increasingly seen as 'bread and butter' assets, rather than alternative assets,” Nikulina said.

“At the same time, lines are blurring between individual 'asset classes' within this group, as investors focus more on underlying return drivers rather than 'asset classes'. While we believe that many asset managers in this area will continue to attract capital, those that acknowledge this increasing sophistication of institutional buyers' approach, and change accordingly, will truly flourish.”

In regard to infrastructure specifically, the report noted a few emerging trends in the asset class.

“While there remains a trend for greater co-investment and direct deals from investors, the very largest investors in the asset class are actually reversing this trend and starting to again re-engage with traditional asset managers to assist in asset execution (both origination and asset management),” the report said. “However, this increased interaction has not been through traditional fund structures, but largely in the form of segregated accounts. These segregated accounts are often focused on areas the asset owner would struggle to access without the assistance of professional expertise.”

The report also noted that “there is increasing market effort from managers positioning themselves as 'mid-market' infrastructure investors”.

“While we believe that the best mid-market managers have a structural advantage over those focusing on larger assets, there are a number of warnings: the mid-market has the potential to become a more competitive market; increasingly, larger mid-market funds and a desire by many investors for co-investment are intellectually incoherent, and will lead to either disappointment of the level of co-investment offered to asset owners, or asset managers potentially having to migrate towards larger investment opportunities,” it said.

The greatest challenge and opportunity in infrastructure investment, according to the report, comes from institutional investors and their role in funding government infrastructure projects.

“In economies where government budgets are heavily constrained, it is vital that those governments provide sufficient incentives for private capital to help address funding gaps. Renewed thinking about regulatory frameworks and risk transfer between the public and private sectors will significantly impact the amount of capital that ultimately gets invested in infrastructure assets around the world,” the report said.

Of Towers Watson's Top 100 Alternative Asset Managers, which boast a total of $3.5 trillion in assets under management (AUM) collectively (up from roughly $3.3 trillion in 2013), three managers oversaw direct infrastructure funds with a total of just under $148.9 billion AUM, representing an 8 percent increase dollar-for-dollar over 2013.

When all investments were taken together, Towers Watson found that 40 percent of the 60 direct infrastructure managers participating came from Europe, 29 percent came from North America, 21 percent from the Asia-Pacific region, and 10 percent from the rest of the world. Total AUM of direct infrastructure surveyed was valued at $344 billion, about 18 percent of the $6.3 trillion total AUM of all 623 participants.

Australia's Macquarie Group was the top-ranked manager in all categories surveyed with $92.3 billion in AUM and $59.3 billion in pension AUM.

Other infrastructure managers to achieve notable rankings included the German Deutsche Asset & Wealth Management, which based on total AUM was ranked 52nd with $29.5 billion, and Canada's Brookfield Asset Management , which ranked 60th with $27.1 billion AUM.