Institutional investor appetite for unlisted infrastructure funds has grown continuously over the last decade. According to Preqin data, $168bn has been raised by unlisted infrastructure fund managers since 2001 with investors committing record amounts of capital year-on-year prior to the onset of the financial crisis in 2008. As such, infrastructure is no longer considered a niche sector within the private equity space and is now widely recognised as a completely separate and independent asset class with a unique risk/return profile.
The majority of infrastructure investors look to such assets to provide a stable and predictable long-term return as well as a degree of portfolio diversification. However, as an asset class born out of the private equity mould, infrastructure (as a separate entity) remains at a crossroads. On the one hand investors recognize and appreciate the benefits of investing in infrastructure assets, but on the other there is a tension between the long-term nature of these assets and the shorter-term focus of the private equity fund model. As a result, industry professionals continue to debate the best way to access infrastructure opportunities and question the suitability of the private equity fund structure when applied to an asset class with a lower risk/return profile and a longer investment horizon.
Preqin data shows that 82% of institutional investors currently gain their exposure to infrastructure assets through commitments to unlisted infrastructure funds. The majority of such funds are structured in accordance to the short-term (10-12 year) private equity blueprint and follow the 2/20 fee model. When looking at the management fee structure for infrastructure funds currently raising capital and those closed with a vintage 2010/2011, the majority (62%) still follow the 2/20 structure. 38% of fund managers are beginning to adjust their fee structures according to growing investor demand but more still needs to be done in order to align both parties.
Therefore, although infrastructure is now widely regarded as a separate asset class, the industry is still structured according to private equity principles. As such, the characteristics attracting institutional investors to the asset class are being overshadowed, with infrastructure assets being applied to fit the pre-existing private equity fund model rather than the reverse. Most infrastructure investors are looking for long-term exposure to a portfolio of lower-risk assets providing a steady income stream, which is the opposite of what is traditionally available through a 10-12 year private equity-style fund with a 2/20 fee structure. There is consequently a mismatch between why investors look for exposure to infrastructure assets and the current financing models being marketed by infrastructure fund managers.
In order to overcome these issues, the fund model must be adapted according to the characteristics of infrastructure assets, meaning longer fund tenors (or structures in place to extend the lifespan) and a reduction in fees according to the level of risk exposure being targeted. Growth of the unlisted infrastructure industry is reliant on a resolution to these key issues and will require greater cooperation between investors and fund managers to improve alignment and increase the flow of capital to infrastructure assets in future.