California-based placement agent Probitas Partners has issued its yearly survey of institutional investors from around the world including pension plans, insurance companies, consultants and funds of funds. What are infrastructure investors excited about and what are their main concerns? Here are our top 10 themes from Probitas' 2016 Infrastructure Institutional Investor Trends report.
1. Fair winds for fundraising: Infrastructure funds continue to collect more capital. By mid-2016, fundraising had already hit $45 billion, up $3 billion from last year. This amount was driven by Brookfield's $14 billion final close in July and Global Infrastructure Partner's $10.8 billion interim close in May, accounting for over half the money raised so far.
2. What goes up…: With this much capital flooding the market – much of it new – 65 percent of investors are worried the trend will negatively impact future returns. There is also a worrying build-up of dry powder, which stood at $140 billion at the end of August, up from just over $100 billion last year.
3. No emerging market appetite: Interest in emerging market opportunities fell drastically from last year, with 60 percent of respondents saying they are less interested in the sector due to political, economic or currency risk. Year-to-date, emerging market focused funds made up only 1 percent of fundraising. Other regions filled the gap, as global funds claimed a 59 percent share of fundraising, Europe-focused funds had 14 percent, and North America and Asia had 13 percent each.
4. Have debt funds peaked? Infrastructure debt funds are failing to hold investor interest. Two years ago, debt funds accounted for 12 percent of fundraising; that share has now fallen to 5 percent.
5. Green light for brownfields: Brownfield/greenfield funds continue to attract the lion's share of investor interest, making up 80 percent of funds raised this year, but pure greenfield funds remained very weak, making up less than 1 percent of the total. Despite massive publicity from the COP21 climate conference in Paris last December, only 4 percent of fundraising has been for renewable energy funds.
6. Real assets: Allocating to infrastructure a broader real assets umbrella is gaining popularity. Investors who say they organise their portfolio this way rose to 45 percent. The market is being quick to respond, with BlackRock's decision in January to merge its infrastructure and real estate platforms standing out as an early, high-profile example.
7. Power up: Energy and power continue to attract the greatest amount of investor attention, with 74 percent of investors saying they will seek to invest in energy and power, compared with 70 percent planning water and waste management commitments and 67 percent for transportation opportunities.
8. Fund structure: While investors' preferred structure for infrastructure funds isn't clear cut, the winner, with 36 percent, is a private equity-style 10-year fund. Preference for a hybrid 10-year structure remained unchanged from last year at 19 percent, with another 19 percent interested in 12- to 15-year funds. Open-ended and evergreen structures captured zero interest in the survey.
9. Target expectations: Almost all investors – 92 percent – said they expected 12.5 percent returns or lower for core brownfield funds. However, only 63 percent of respondents had the same expectation for infrastructure debt funds. For value-added brownfield funds, 65 percent of investors expected greater than 12.5 percent returns.
10. Losing steam? There was a noticeable leap from last year in investors looking to decrease their allocations to infrastructure from 3 to 16 percent. The strongest response, at 39 percent, was still to increase their allocation from last year – but that loss of interest among some investors is definitely something to keep an eye on for next year.