When the Goliaths are battling, David stands watching

GIP and Brookfield are aiming to raise a record $27bn. But that doesn’t mean smaller fund managers won’t have room to play.

When news recently broke that both Global Infrastructure Partners (GIP) and Brookfield Asset Management (Brookfield) were once again on the fundraising trail, the industry was abuzz.

Both firms had been deploying their second vehicles at a steady pace, feeding in speculation that their third offerings would be marketed before year-end. And as managers of the world’s largest infrastructure funds, they were expected to be going after record targets this time round.

The scale of their ambitions did not disappoint: should the New York-based fund manager and its Canadian counterpart hit their respective hard-caps, they’ll have raised a combined $27 billion.

But with the race for scale going apace, we couldn’t help but wonder what this would mean for smaller fund managers also looking to raise money. The industry, indeed, seems well aware that more capital is getting into fewer hands: visible since 2013, this trend towards increased concentration was once again highlighted by our Research & Analytics team in the third quarter of this year.

Yet it’s not all about size, according to sources we polled on the topic this week. In some instances, bigger is better: large institutional investors such as the California Public Employees’ Retirement System, the New York City Retirement System and others of that caliber have a lot of money to put to work; they’d rather do it by writing sizeable cheques. As one industry expert told us: “their investment dollars are so large they need to be more efficient.”

On the other hand, there are LPs with much smaller portfolios who can’t afford to cut nine-figure cheques. Some of these also see large funds more geared towards generating fees than focusing on the underlying product and would rather back small- and mid-market managers.

But the issue goes beyond size. “When you’re looking at funds that are $1 billion or less, a lot of those funds have very targeted mandates,” Kelly DePonte, a managing director at placement advisory firm Probitas Partners , recently told us. “For instance, they’re just focused on Peru or just focused on renewables. There are many US funds that are just focused on energy.”

Depending on the type of exposure an investor seeks, these more tailored offerings may thus prove a complement to wider strategies.

As a speaker at an event held earlier this week by our sister publication PERE put it: “You have to find a way to co-exist with these larger funds. This means presenting the firm as an alternative rather than a competitor […] when speaking to investors.” The concept seems equally valid in the world of infrastructure.

So smaller funds probably aren’t competing directly with the likes of GIP and Brookfield. Does that mean the latter firms will have a field day trying to raise their latest vehicles? After all, these are so big that one could wonder whether there’ll be enough space for both of them.

Observers believe so. With the exception of the New Mexico State Investment Council, there is no overlap in the top level investors who made commitments to GIP and Brookfield’s previous infrastructure funds. And although their current targets are higher than they’ve ever been, they could be reached fairly easily if repeat LPs bump up their previous allocations.

“The thing about Brookfield and GIP is that they both have excellent reputations,” DePonte said. “So it really is the battle of the titans.”