The current infrastructure fundraising market is defined by a record number of funds on the road seeking unprecedented levels of investor capital, and heightened institutional investor caution in the aftermath of the global financial crisis. The consequence of both is an increasingly congested fundraising market, with success only being achieved by those fund managers offering the most attractive opportunities. Although some of the largest and most sophisticated institutions are now operating direct infrastructure investments programmes, the unlisted fund model will continue to play a vital role in generating private investment in the asset class. It is therefore crucial, as public institutions pull back from large scale infrastructure financing, that GPs employ an efficient method of funnelling investor capital to infrastructure assets over the coming years.
LPs are becoming increasingly powerful in the relationships they share with fund managers. An outcome of this is that they can demand greater concessions from GPs in return for fund commitments. Preqin’s mid-2011 investor survey looked at areas in which respondents felt the relationship between GP and LP needed improving. The most commonly cited issue was the level of fees charged by fund managers, with investors taking issue with management fees, payment of fees on uninvested capital, and carry structures in particular.
Michaela Sved (Director, MVision), commenting in a keynote address for the 2012 Preqin Global Infrastructure Report, stated: ‘Standard LP due diligence now includes management budget and reconciliation with management fees – a few years ago, the 2/20 model was accepted – now there is a lot more scepticism around the ‘for profit’ management fee; that is a particular area for push back, more so than performance fees’.
Preqin data on management fees for 2010/2011 vintage funds and those funds currently raising suggests that LPs are enjoying some success in the drive for more favourable terms, with 50% of the funds now charging less than a 2% management fee and just 3% charging more than that. In addition to this, larger institutional investors are often requesting concessions for ‘big-ticket’ fund commitments, an example of such being CalSTRS’ recent $500 million investment with Industry Funds Management (IFM). Issues such as the current saturated fundraising climate and the trend amongst highly sophisticated institutions for direct investments, squeezing the pool of capital available for infrastructure fund managers, are expected to further increase the downward pressure on fees going forward.
When it comes to fees and fund structures, GPs that can align interests will be increasingly favoured by institutional investors. Preqin data on fund terms does suggest that more fund managers are considering a reduction in the much maligned 2% management fee, however further considerations in areas such as staggered fees for ‘big-ticket’ investments and changes in the fund structure to better match the liabilities of key parts of the investor base, such as pension funds and insurance companies, would help GPs gain traction over their peers.