As returns come under pressure from increasing competition, limited partner (LP) investors in infrastructure are increasingly worried – and are also focusing their concerns on the level of fees being charged by fund managers.
The latest survey of institutional investors in infrastructure by placement agent Probitas Partners found that 57 percent of those canvassed thought there was too much money coming into the sector and affecting future returns – making it easily the biggest single concern of infrastructure investors. The equivalent figure for last year was 35 percent.
The second-biggest concern would appear to be connected to the first. With competition for assets hitting returns, LPs are keen to avoid those returns being eroded even further by fund managers charging high levels of fees. Hence, 29 percent of respondents expressed the view that “standard fee levels on brownfield focused funds are eating away at my returns”.
This, in turn, will be a worry for the fund managers themselves. The (pre-Crisis) days, of assuming that the private equity “two and twenty” model (2 percent fees, 20 percent carried interest) could be taken off the shelf and applied widely to infrastructure funds, appear to be long gone.
The survey finds that 50 percent of LPs believe brownfield funds should charge management fees no higher than 1.25 percent and 43 percent think they should be less than 1.0 percent. For greenfield funds, more than half (54 percent) say fees should be no higher than 1.25 percent. Even opportunistic funds should charge 1.25 percent or less according to 50 percent of LPs, with 43 percent saying they are entitled to between 1.25 percent and 1.5 percent.
The same squeeze is being applied to carried interest. For brownfield funds, 76 percent think carry should be somewhere between 5.0 percent and 15.0 percent; for greenfield, more than half (52 percent) believe 10.0 percent to 15.0 percent is the right level; while, for opportunistic funds, 62 percent say carry should be between 10.0 percent and 20.0 percent.
Opportunistic funds are the only ones to see a material number of LPs (15 percent) saying 20.0 percent or more carried interest is appropriate.
The survey gleaned the views of 72 LPs, including public and corporate pension plans, funds of funds and sovereign wealth funds among others.