Survey: 2 and 20 too high for infra funds

A PEI Media survey of institutional investors in infrastructure has shed new light on the debate over whether private equity-style compensation structures are appropriate in infrastructure. It also found 60% of investors have been active in the space for less than three years.

Less than one in ten investors in infrastructure think a 2 percent management fee on committed capital is acceptable for an infrastructure fund, according to a new survey conducted by PEI Media, publisher of this website.

The survey of institutional investor sentiment in the global infrastructure market, to be published in a new book, The Definitive Guide to Infrastructure Fundraising, published by PEI Media and edited by law firm SJ Berwin, found that the majority of investors want management fees set below 1.4 percent. A quarter of respondents said a 1.5 percent fee is acceptable, while just 9 percent of those surveyed found 2 percent fees appropriate for the asset class. All 48 of the investors surveyed agreed unanimously that management fees should be reduced after a fund’s investment period has concluded.

Two thirds of respondents said the level of carry for infrastructure funds should be set at 15 percent or lower, but just 17 percent think the private equity standard of 20 percent is appropriate to infrastructure. The majority of respondents (67 percent) favour the whole-fund method of carried interest, rather than the deal-by-deal method (17 percent). 16 percent had no preference in this respect.

In terms of the hurdle rate for earning carry, half of the investors surveyed liked the standard 8 percent level. 25 percent preferred a 10 percent hurdle rate. 17 percent favoured a 7 percent hurdle rate, while a small minority indicated they would like the hurdle to be set at inflation plus a fixed percentage depending on the fund.

Elsewhere in the survey, PEI found that placement agents featured in two thirds of the infrastructure fundraising campaigns that the respondents have been involved in. Four out of five investors insist on a key-man clause when making allocations to an infrastructure fund. In making the decision to allocate funds to infrastructure, third-party consultants play an important role, with a quarter of investors putting their decision down to this, while in-house investment committee decisions account for 42 percent of allocations.

In relation to the possibility of increasing allocations to the asset class, less than one in five of investors were sure they would, with the remainder split almost equally between either definitely not increasing allocations or not being sure.

Meanwhile the interest in secondaries funds is strong, with two thirds of investors considering investing in this kind of fund. 17 percent would consider investing in funds of funds, whereas 16 percent would not invest in either of these.

The relative youth of infrastructure as an asset class was revealed in one question, with almost 60 percent of investors saying they have been investing in infrastructure for less than three years. In terms of exposure, two thirds of the investors questioned allocate 5 percent or less of their portfolio to infrastructure. Less than one in ten allocate over 10 percent of their portfolio to infrastructure.

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