Last year, Preqin released the results of its June 2010 infrastructure investor study. Despite increased investor optimism in the wake of the global financial crisis, a number of key issues were identified by LPs that they felt needed to be addressed in order to ensure continued growth within the industry. Management fees, carry structures, liquidity, LP/GP interaction and hurdle rates were all placed under the microscope and the difficult fundraising environment meant investors gained significantly more power when negotiating fund terms and conditions.
A year on, the results of our June 2011 Preqin Investor Outlook: Infrastructure indicate that institutional investor appetite for infrastructure is again on the rise, with 70% of surveyed investors expecting to make further investments in the asset class in the coming 12 months. However, the current infrastructure fundraising market remains highly competitive and the same contentious issues continue to impact investor appetite and the ability of fund managers to raise capital.
The management fee charged and how carried interest is structured remain two of the most prevalent areas in need of improvement, with 62% and 53% of investors citing each issue as a problem respectively. One investor commented: “Manager fees are far too high in most cases, and there are a number of conflicts of interest that can arise. Performance fees are often structured poorly, based on capital appreciation rather than performance above a hurdle.”
While management fees remain problematic, the proportion of respondents stating that they are in need of improvement has declined from 72% in June 2010. Similarly, the proportion of surveyed investors selecting carry structures as a contentious issue also fell from 72% last year. This suggests that infrastructure fund managers are taking note of institutional investor demands and reforming their fee structures to create a more aligned LP-GP relationship.
Investors felt that the alignment of interests needed improvement in several other areas; 56% of investors take issue with having to pay fees on capital that has not yet been invested for example, slightly more than the 53% that stated the same in 2010. Similarly, 42% of surveyed investors stated that issues surrounding hurdle rates remain, a slight increase from last year when 39% of investors felt that there was a misalignment of interests in this area. Commenting on the subject, one investor stated: “Hurdles should be appropriate to the risk targeted by the fund.”
One-quarter of investors felt that there needed to be greater interaction between themselves and fund managers in 2010, but just 13% were of this opinion this year, suggesting that the channels of communication have opened up between investors and fund managers in the past year. The results of the survey also imply that investors are a lot more satisfied with the commitments GPs are making to their own vehicles; the proportion of investors that stated this was an area of concern fell from 45% in 2010 to 28% this year.