Compensation for infrastructure investment professionals is expected to stay flat, Serene Hamzawi, managing partner at recruitment and advisory firm Sousou Partners, told us in February 2020.
That forecast was made before covid was declared a pandemic and the world went into multiple lockdowns. Roughly a year later, Hamzawi and Sousou were proven right and the industry showed resilience once again.
“As a lot of people have said this year, ‘flat is the new up’, as far as compensation is concerned,” Hamzawi told us recently, sharing Sousou’s data on the base salaries and bonuses executives earned in 2020 exclusively with Infrastructure Investor.
“Relative to the rest of the world and where we are with covid and how much other industries have suffered, infrastructure has been relatively shielded, albeit with its own problems. Most general infrastructure funds will have some problem assets – if they own airports, for example, they’re going to suffer. But the overall portfolio, given how much people have invested in other sub-sectors like renewables or utilities, have been pretty stable, if not up,” she explains.
That stability in performance has also kept pay levels mostly intact.
“Executives who have felt the pain most would be at the managing director- or director-level,” Hamzawi says. “There, we would have seen comp going down maybe 10 or 15 percent on average. And it wouldn’t be because of fund performance, but because firms are being cautious.”
For those at the vice-president or associate level, pay has either remained unchanged or increased by between 2 and 5 percent.
“But the other thing I would say is that there has probably been more differentiation within the team,” Hamzawi notes. “When there’s a lot to go around, there’s not that much of a gap between the top performer and lower performer.
“I think this is the year to ‘send messages’ if you like, without necessarily letting go of anybody.”
Bring in the specialists
Not only are firms not letting go of staff, they are expanding teams – a move resulting from a need or desire to diversify their product offering.
“We’ve seen quite a lot of our clients continuing to raise capital successfully, continuing to diversify product and thinking of diversifying product in the next year or so,” Hamzawi says.
A look at Infrastructure Investor’s 2020 full-year fundraising report illustrates her point. Despite the difficult environment last year, the asset class still managed to raise $102.6 billion, just 15 percent less than the capital raised in 2019.
This diversification has shielded the asset class and is supporting growth and compensation levels. “It’s all underpinned by positive capital inflows into the sector,” Jamie McKinnell, a partner at Sousou, says.
“And because of that, you either need to add more product to capture more capital or add product to get more capital out the door.”
An example of how diversification of strategies impacts compensation is digital infrastructure, a sector Hamzawi describes as “the theme of the day”.
“When you’re looking for talent in that sub-sector, you’re not just looking at infrastructure funds because very few have invested in digital so far. You’re looking at traditional private equity groups. You’re looking at smaller funds and these guys have a different comp structure and so, having to attract that kind of specialisation will only drive compensation up,” she says.
Feeling the squeeze
But product diversification is not the only thing driving the hiring of specialists – a trend that’s been in evidence for quite a while, according to Hamzawi. It is also driven by the increased focus on asset management and “actually squeezing value out of assets”, she explains.
“I suspect this year and next, it will come to the fore even more,” Hamzawi adds, given that transactions have slowed in light of the pandemic.
“If they’re transacting less and if they’re having trouble with some assets, then it’s going to be key to think about asset management and how to create the most value possible.”
Or, as one industry source puts it: “In the core space, managers can’t shoot the lights out on fees, and I think fund managers know this.”
While management fees in the core space are being pushed downwards, how those managing core funds are compensated is important, our source stresses.
“The other thing that comes into play is diversity and that’s a massive theme in the real assets world”
“Do you want people in those teams who are looking after core funds to feel like second-class citizens?” this person asks. “An interesting dynamic is where managers have more than one product – a core and core-plus product – how they incentivise the best people across all areas.”
According to Hamzawi, compensation in the core infrastructure space “is getting pushed up because fund managers have to get the same level of talent or they have to think about how to compensate people a little bit differently to attract talent.
“What used to be attractive only to private equity infrastructure and energy funds, such as renewables a few years ago, is now getting into the more core infrastructure funds as well. So, the talent is blending and the compensation is getting closer as well.”
In addition to diversification of product, which Hamzawi sees as going strong – “I don’t think it’s anywhere near stopping, be it in digital, expanding into debt, or whether it’s ESG or impact investing, these are all coming” – there is another theme gaining momentum.
“I think the other thing that comes into play is diversity and that’s a massive theme in the real assets world – infrastructure is the same as real estate, and in some cases, slightly worse,” she comments.
“It depends on geography, but both asset classes suffer from a lack of diversity, gender or otherwise,” she says. “So, as the teams are growing and diversifying their strategies, trying to also focus on that makes it even more complicated. But I think it’s a great thing that our industry is finally catching up.”
As for compensation next year, much will depend on the impact 2020 will have on this year and next. “That will be a key differentiator whether compensation goes up. But as far as demand for the asset class and demand for talent are concerned – then compensation should increase.”