Increasing investor concerns over the risk/return profile of the infrastructure asset class and the high fees charged by fund managers applying the private equity fund model to infrastructure funds is resulting in some investors looking at alternative routes to market. Many larger investors have been investing directly in infrastructure assets and bypassing fund manager fees. Preqin’s Infrastructure Online database is currently tracking over 450 investors that consider direct infrastructure investments, which represents 28% of all active investors in the space.
Direct investors in the infrastructure asset class have an average $61bn in total assets under management, with a median target allocation to infrastructure of 7.4%. The average direct investor in infrastructure is significantly larger than the average investor targeting unlisted fund commitments. Non-direct investors have median total assets under management of $32.7bn, which is 46% lower than direct investors. This stems from the fact that expenditures associated with direct investment can be high; direct investors must have a team of experienced infrastructure investment professionals to manage the assets and need to invest higher levels of capital in order to secure an asset. Consequently, the average target allocation to infrastructure for non-direct investors (4.7%) is lower than those investors making direct investments.
Despite the barriers to entry, those with the resources to invest directly are more actively pursuing these investments. Canadian public pension funds such as OMERS and Ontario Teachers’ Pension Plan now commit capital exclusively to direct investments, having moved away from making fund commitments. European institutional investors are following suit, with Dutch public pension fund PensionDanmark, Dutch asset manager PGGM, and British private sector pension funds Universities Superannuation Scheme (USS) and Superannuation Arrangement of the University of London (SAUL) all shifting strategies towards direct investment, at the expense of unlisted infrastructure funds. This trend is being replicated across many other large institutional investors active in the asset class and, to some extent, among smaller investors seeking new investment platforms.
The UK’s £2bn Pensions Infrastructure Platform is an example of this movement. The Platform, which will be modelled on the structure of firms such as Industry Funds Management, has already secured capital from both public and private schemes. It will pool the collective investment capital in order to access capital-intensive investments, such as infrastructure, via a dedicated investment management team with significantly reduced fees. This is an ambitious but promising method for smaller institutional investors to gain direct access to assets with bespoke lifespans.
Despite this trend, 78% of active investors in the infrastructure asset class have a target allocation of less than 7.6%, and 69% have less than 5% of total assets targeted towards infrastructure investments. Smaller investors are therefore likely to continue to rely on experienced infrastructure fund managers to access the asset class going forward, using the unlisted infrastructure fund model as opposed to direct strategies.