Tips from LPs

Investor interest in infrastructure is running at an all-time high. But the word on the street is that there are too many infrastructure funds out in the market that do not offer a compelling enough proposition for limited partners (LPs) to invest in.

If you are planning to hit the road in 2011 to raise a new vehicle, here are four things you might wish to consider, based on market feedback gathered by Infrastructure Investor:

Be different: Antin Infrastructure Partners closed on €1.1 billion last year on the back of a pitch that mathematically correlated its target size with the type of deals it would target and the region where it was sourcing them from. Developer John Laing’s debut listed infrastructure fund raised £270 million (€308 million; $440 million) with a yield-focused proposition based on its first offer agreement to acquire operational PFI assets from its developer parent. The moral of these two examples: go to investors with a well-defined, differentiated investment proposition and you are likely to catch their attention. Try a “generalist” proposition and you probably will not. 

Bruno Alves

Think smaller and locally: It might be tempting to think big when raising a new vehicle but most general partners (GPs) would actually benefit from trying to raise smaller funds with a more regional or local focus. Take UK-based investor Equitix’s second infrastructure fund. Aiming for a £150 million final close, it will not be demanding big tickets from LPs. And by focusing on small, local infrastructure deals, it is targeting a market with little competition while attracting attention from local UK pension funds. The result: it has already raised £100 million after only six months on the fundraising trail.

Discount fees: No GP likes to dwell on this but it’s become an inescapable fact of life. LPs are putting downward pressure on fees and will not be ignored. Granted, a few GPs will be able to get away with fee structures reminiscent of the private equity model. But most won’t. That means innovative thinking and willingness to compromise. A few solutions being road-tested today: volume discounts, first rights on co-investment opportunities, de-linking management fees from inflation, linking carry to yield instead of returns, and charging management fees close to the 1 percent mark.

Bring out the A-Team: “Investors want fund managers with a demonstrable track record in the space. The problem with a lot of funds out there is that they lack compelling deal sourcing,” confided a well-known placement agent. So make sure your team is well-stocked with people that actually have experience in infrastructure – not just private equity or real estate – and have the right contact book to source proprietary deals. A good brand name might get you a foot in the door. But wallets will not open on the basis of that alone.