Core infrastructure appears to be having a moment. Thanks in no small part to the resilience the sector has shown through the pandemic, core infrastructure funds are attracting more investment than before, with a number of firms launching new core funds in order to make the most of the sector’s rise in popularity.
Swedish private equity firm EQT’s Active Core Infrastructure fund, which launched in March and seeks to raise €5 billion, is a recent case in point. As Vauban Infrastructure’s deputy chief executive Mounir Corm told us last month when asked about the increased appetite for core infrastructure, “returns have been strong and yields have been maintained. The essentiality of these assets is proven and that has re-enforced appetite from clients.”
A look at the latest data from recruitment and advisory firm Sousou Partners on the base salaries and bonuses executives earned in 2021 – shared exclusively with Infrastructure Investor – suggests the sector’s appetite for core infrastructure is also reflected in executives’ earnings. Not only did compensation for core infrastructure investment professionals rise in 2021, it grew at a faster rate than the compensation of those executives’ private equity counterparts.
According to Sousou managing partner Serene Hamzawi, the compensation growth in core funds can be attributed not just to a rise in popularity of core infrastructure, but to a general prevalence of product diversification among the infrastructure sector’s heavyweight asset managers.
This, in turn, has necessitated a need to “equalise” compensation among each firm’s product offering, including core funds.
“Across real assets, the big managers are getting bigger. There’s a concentration of capital allocation towards those managers and product diversification to attract the LPs. Those that are normally higher up the risk curve are going down to core, those that were traditionally more core are diversifying up the risk curve, and renewables and energy continue to grow [in firms] that we have considered more core in the past,” Hamzawi explains.
“Obviously, the technologies are different and within those firms you’re going to get very different talents working on core infrastructure or on a wind farm, for example. Having those two different products within the same organisation, GPs need to maintain consistent compensation across the board.”
Outsized demand for juniors
Another major trend this past year has been the rise in compensation offered to investment executives who are either starting out or at a very early stage in their careers, with most of the compensation growth in 2021 across core infrastructure and private equity infrastructure funds occurring at the junior level.
“For all real assets, real estate and infrastructure across the board, the demand for juniors is really high,” Hamzawi says. “The supply is not as high – there is an imbalance in terms of numbers and quality – and that’s why you see their compensation being driven upwards.
“There isn’t one firm that I can think of that [is] not looking for juniors at every level. From large managers to small boutique firms, you name it, every GP is looking for juniors.”
With a roughly 20 percent rise at the associate levels – and with some firms revealing a rise of as much as 25 percent – the jump in compensation is significantly higher than the junior-level compensation growth we had seen in previous years.
Hamzawi says the smaller pool of quality junior candidates in the infrastructure investment space can be attributed to a difference in the calibre of graduates now moving into investment banking. In general, potential candidates are also less inclined to see investment banking as the only route to building wealth, with many graduates from top-tier universities who would traditionally go into investment banking opting to explore different career paths.
“Most GPs want to recruit from top-tier investment banks. However, investment bank teams are smaller than they used to be,” Hamzawi adds. “Also, investment banking is not attracting as many applicants or necessarily to the same calibre as before.
“Ten to 15 years ago, if you had amazing schooling and you wanted to build wealth and get into the right industries, the [popular] route was to go into investment banking. When you think about the world now, kids today are not necessarily attracted to investment banking. There are other routes that are perceived as more fun, faster and more entrepreneurial than going through investment banking. That is definitely affecting the supply [of potential candidates] at the junior level.”
She points out that many candidates are failing the financial modelling tests that are traditionally given to prospective junior employees. This is not necessarily due to a lack of numerical skills, she adds.
“Individuals are failing those modelling tests largely due to how they interact and how employers see them in a situation where they’re going to have to negotiate. Employers think about them and their growth within the organisation and, because of our highly digitalised world and kids growing up in digitalised environments, these [intangible] skills at the junior level are perhaps a little bit lacking these days,” she says.
“[As a result], juniors that are really strong are in high demand and that’s why you’re seeing their compensation being raised, either to attract them or to retain them. Firms are also trying to hire them at an earlier stage, identifying the strong graduates that are going to be graduating that year or the year after, and making them an offer [before they graduate]. There’s definitely a supply-demand crisis at that level.”
One trend to watch in coming years could be upward pressure on senior investment executive compensation resulting from the dramatic rise in associate-level compensation currently occurring across the sector. With growth in compensation at the junior level more than double the growth in compensation at senior levels in some firms, the outsized jump in compensation for junior level staff could lead to bigger jumps in compensation at more senior levels as today’s in-demand juniors move up the career ladder.
“The junior levels are definitely accelerating in terms of compensation, more than other levels. If, on average, the other levels’ compensation is going up by five to 10 percent, the juniors’ are going up by 20 to 25 percent,” Hamzawi notes.
“We haven’t seen it played out yet but, if you think about it, it’s not that long a ladder to climb from an associate in these industries to managing director – it’s not a 25-year ladder – and in terms of compensation, that gap [between levels] is narrowing.
“[Associates] have gotten these raises year on year because of the shortage of solid juniors, and what is their expectation going to be for next year and the year after? Are they expecting that same raise? Will they be given that same raise – and how is that going to play out? It will be interesting to see individuals’ expectations [over time].”